Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of ___March___ 2007
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
TELUS CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
AND
MANAGEMNT'S DISUSSION AND ANALYSIS
DECEMBER 31, 2006
______________________________________________________________________________
TELUS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
______________________________________________________________________________
management's report
Management is responsible to the Board of Directors for the preparation of the
Consolidated financial statements of the Company and its subsidiaries. These
financial statements have been prepared in accordance with Canadian generally
accepted accounting principles ("GAAP") and necessarily include some amounts
based on estimates and judgments.
The Company maintains a system of internal controls that provides management
with reasonable assurance that assets are safeguarded and that reliable
financial records are maintained. This system includes written policies and
procedures, an organizational structure that segregates duties and a
comprehensive program of periodic audits by the internal auditors. The Company
has also instituted policies and guidelines that require TELUS team members
(including Board members and Company employees) to maintain the highest ethical
standards, and has established mechanisms for the reporting to the Audit
Committee of perceived accounting and ethics policy complaints. In addition,
the Chief Compliance Officer, appointed in 2003, works to ensure the Company
has appropriate policies, controls and measurements in place to comply with all
legal and regulatory requirements. Annually, the Company performs an extensive
risk assessment process, which includes interviews with senior management, a
web-enabled risk and control assessment survey distributed to a large sample of
employees, and input from the Company's strategic planning activities. Results
of this process influence the development of the internal audit program. Key
enterprise-wide risks are assigned to executive owners for the development and
implementation of appropriate risk mitigation plans. During 2002, the Company
implemented a Sarbanes-Oxley certification enablement process, which, among
other things, cascades informative certifications from the key stakeholders
within the financial reporting process, which are reviewed by the Chief
Executive Officer and the Chief Financial Officer as part of their due
diligence process. In 2004, the process was enhanced to comply with new
Canadian securities regulations, which went into effect in the first quarter of
2004. In 2006, the final stages of Section 404 of the United States
Sarbanes-Oxley Act regarding internal controls over financial reporting were
successfully implemented. One of the 2006 developments included the integration
of SOX 404 sign-offs with the SOX 302 cascading certifications of key
stakeholders in the financial reporting process.
The Company has a formal policy on Corporate Disclosure and Confidentiality
of Information, which sets out policies and practices including the mandate of
the Disclosure Committee; the policy was approved by the Board of Directors,
and put into effect, in 2003.
The Chief Executive Officer and the Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures related
to the preparation of the Management's discussion and analysis and the
Consolidated financial statements, as well as other information contained in
this report. They have concluded that the Company's disclosure controls and
procedures were effective, at a reasonable assurance level, to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to them by others within those entities, particularly
during the period in which the Management's discussion and analysis and the
Consolidated financial statements contained in this report were being prepared.
The Board of Directors has reviewed and approved these Consolidated
financial statements. To assist the Board in meeting its oversight
responsibilities, it has appointed an Audit Committee, which is comprised
entirely of independent directors. All the members of the committee are
financially literate and the Chair of the committee has financial expertise and
meets the applicable securities laws as a financial expert. The committee
oversees the Company's accounting and financial reporting, internal controls
and disclosure controls, legal and regulatory compliance, ethics policy and
timeliness of filings with regulatory authorities, the independence and
performance of the Company's external and internal auditors, the management of
the Company's risks, its credit worthiness, treasury plans and financial
policy, and its whistleblower and accounting and ethics complaint procedures.
The committee meets no less than quarterly and, as a standard feature of
regularly scheduled meetings, holds an in-camera session with the external
auditors and separately with the internal auditors without other management,
including management directors, present. It oversees the work of the external
auditors and approves the annual audit plan. It also receives reports on the
external auditor's internal quality control procedures and independence.
Furthermore, the Audit Committee reviews: the Company's major accounting
policies including alternatives and potential key management estimates and
judgments; the Company's financial policies and compliance with such policies;
the evaluation by either the internal or external auditors of management's
internal control systems; and the evaluation by management of the adequacy and
effectiveness in the design and operation of the Company's disclosure controls
and internal controls for financial reporting. The Audit Committee also
considers reports on the Company's business continuity and disaster recovery
plan; reports on financial risk management including derivative exposure and
policies; tax planning, environmental, health and safety risk management and
management's approach for safeguarding corporate assets; and regularly reviews
material capital expenditure initiatives. The committee pre-approves all audit,
audit-related and non-audit services provided to the Company by the external
auditors (and its affiliates). The committee's terms of reference are
available, on request, to shareholders and at telus.com/governance.
/s/Robert G. McFarlane /s/Darren Entwistle
______________________ ____________________
Robert G. McFarlane Darren Entwistle
Executive Vice-President President
and Chief Financial Officer and Chief Executive Officer
February 14, 2007 February 14, 2007
report of management on internal control over financial reporting
Management of TELUS is responsible for establishing and maintaining adequate
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting.
TELUS' Chief Executive Officer and Chief Financial Officer have assessed the
effectiveness of the Company's internal control over financial reporting as at
December 31, 2006 in accordance with the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Internal control over
financial reporting is a process designed by, or under the supervision of, the
Chief Executive Officer ("CEO") and the Executive Vice President and Chief
Financial Officer ("CFO") and effected by the Board of Directors, management
and other personnel to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Due to its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements on a timely basis. Also projections of
any evaluation of the effectiveness of internal control over financial
reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Based on this
assessment, management has determined that the Company's internal control over
financial reporting is effective as at December 31, 2006. In connection with
this assessment, no material weaknesses in the Company's internal control over
financial reporting were identified by management.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as at December 31, 2006, has been audited by
Deloitte & Touche LLP, the Company's Independent Registered Chartered
Accountants, who also audited the Company's Consolidated Financial Statements
for the year ended December 31, 2006. As stated in the Report of Independent
Registered Chartered Accountants, they have expressed an unqualified opinion on
management's assessment of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting as of December 31, 2006.
/s/Robert G. McFarlane /s/Darren Entwistle
______________________ ____________________
Robert G. McFarlane Darren Entwistle
Executive Vice-President President
and Chief Financial Officer and Chief Executive Officer
February 14, 2007 February 14, 2007
report of independent registered chartered accountants
To the Board of Directors and Shareholders of TELUS Corporation
We have audited management's assessment, included in the accompanying report of
management on internal control over financial reporting, that TELUS Corporation
and subsidiaries (the "Company") maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the
year ended December 31, 2006, of the Company and our report dated February 14,
2007, expressed an unqualified opinion on those financial statements.
/s/Deloitte & Touche LLP
________________________
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Vancouver, Canada
February 14, 2007
report of independent registered chartered accountants
To the Board of Directors and Shareholders of TELUS Corporation
We have audited the accompanying consolidated balance sheets of TELUS
Corporation and subsidiaries (the "Company") as at December 31, 2006 and 2005,
and the related consolidated statements of income, retained earnings and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
With respect to the financial statements for the year ended December 31,
2006,we conducted our audit in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight
Board (United States). With respect to the financial statements for the year
ended December 31, 2005, we conducted our audit in accordance with Canadian
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of TELUS Corporation and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for the years then ended in conformity with
Canadian generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2006, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 14, 2007, expressed, an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over
financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/Deloitte & Touche LLP
________________________
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Vancouver, B.C.
February 14, 2007
consolidated statements of income
Years ended December 31 (millions except per share amounts) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 8,681.0 $ 8,142.7
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OPERATING EXPENSES
Operations 5,022.9 4,793.5
Restructuring and workforce reduction costs (Note 7) 67.8 53.9
Depreciation 1,353.4 1,342.6
Amortization of intangible assets 222.2 281.1
--------------------------------------------------------------------------------------------------------------------------------
6,666.3 6,471.1
--------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,014.7 1,671.6
Other expense, net 28.0 18.4
Financing costs (Note 8) 504.7 623.1
--------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 1,482.0 1,030.1
Income taxes (Note 9) 351.0 322.0
Non-controlling interests 8.5 7.8
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME AND COMMON SHARE AND NON-VOTING SHARE INCOME $ 1,122.5 $ 700.3
================================================================================================================================
INCOME PER COMMON SHARE AND NON-VOTING SHARE (Note 10)
-- Basic $ 3.27 $ 1.96
-- Diluted $ 3.23 $ 1.94
DIVIDENDS DECLARED PER COMMON SHARE AND NON-VOTING SHARE $ 1.20 $ 0.875
TOTAL WEIGHTED AVERAGE COMMON SHARES AND NON-VOTING SHARES OUTSTANDING
-- Basic 343.8 357.1
-- Diluted 347.4 361.0
The accompanying notes are an integral part of these consolidated financial
statements
consolidated statements of retained earnings
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF PERIOD $ 849.7 $ 1,008.1
Net income 1,122.5 700.3
--------------------------------------------------------------------------------------------------------------------------------
1,972.2 1,708.4
Common Share and Non-Voting Share dividends paid, or payable, in cash (411.7) (312.2)
Purchase of Common Shares and Non-Voting Shares in excess of stated capital (Note 18(f)) (498.6) (541.1)
Adjustment for purchase of share option awards not in excess of their fair value 2.1 (3.4)
Adjustment of tax treatment of items charged directly to retained earnings 16.1 --
Warrant proceeds used in determining intrinsic value of warrants in excess of amounts
ultimately received (Note 18(c)) -- (2.0)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD (Note 18) $ 1,080.1 $ 849.7
================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
consolidated balance sheets
As at December 31(millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ -- $ 8.6
Short-term investments 110.2 --
Accounts receivable (Notes 13, 20(b)) 707.2 610.3
Income and other taxes receivable 95.4 103.7
Inventories 196.4 138.8
Prepaid expenses and other (Note 20(b)) 195.3 154.7
Deferred hedging asset (Note 17(b)) 40.4 --
Current portion of future income taxes -- 226.4
--------------------------------------------------------------------------------------------------------------------------------
1,344.9 1,242.5
--------------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net (Note 14)
Property, plant, equipment and other 7,466.5 7,339.4
Intangible assets subject to amortization 549.2 637.5
Intangible assets with indefinite lives 2,966.4 2,964.6
--------------------------------------------------------------------------------------------------------------------------------
10,982.1 10,941.5
--------------------------------------------------------------------------------------------------------------------------------
Other Assets
Deferred charges (Note 20(b)) 976.5 850.2
Investments 35.2 31.2
Goodwill (Note 15) 3,169.5 3,156.9
--------------------------------------------------------------------------------------------------------------------------------
4,181.2 4,038.3
--------------------------------------------------------------------------------------------------------------------------------
$16,508.2 $ 16,222.3
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ 11.5 $ --
Accounts payable and accrued liabilities (Note 20(b)) 1,363.6 1,393.7
Income and other taxes payable 10.3 --
Restructuring and workforce reduction accounts payable and accrued liabilities (Note 7) 53.1 57.1
Advance billings and customer deposits (Note 20(b)) 606.3 571.8
Current maturities of long-term debt (Note 17) 1,434.4 5.0
Current portion of deferred hedging liability (Note 17(b)) 165.8 --
Current portion of future income taxes 93.2 --
---------------------------------------------------------------------------------------------------------------------------------
3,738.2 2,027.6
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (Note 17) 3,493.7 4,639.9
---------------------------------------------------------------------------------------------------------------------------------
ther Long-Term Liabilities (Note 20(b)) 1,257.3 1,635.3
---------------------------------------------------------------------------------------------------------------------------------
Future Income Taxes 1,067.3 1,023.9
---------------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interests 23.6 25.6
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Note 18) 6,928.1 6,870.0
---------------------------------------------------------------------------------------------------------------------------------
$16,508.2 $ 16,222.3
================================================================================================================================
Commitments and Contingent Liabilities (Note 19)
The accompanying notes are an integral part of these consolidated financial
statements
Approved by the Directors:
Director: Director:
/s/Brian F. MacNeill /s/Brian A. Canfiel
____________________ ___________________
Brian F. MacNeill Brian A. Canfield
consolidated statements of cash flows
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,122.5 $ 700.3
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 1,575.6 1,623.7
Future income taxes 409.2 340.0
Share-based compensation (Note 11(a)) 25.1 24.3
Net employee defined benefit plans expense (5.4) 3.9
Employer contributions to employee defined benefit plans (123.3) (118.8)
Restructuring and workforce reduction costs, net of cash payments (Note 7) (4.0) (13.6)
Amortization of deferred gains on sale-leaseback of buildings, amortization
of deferred charges and other, net 51.7 1.1
Net change in non-cash working capital (Note 20(c)) (247.7) 353.7
--------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 2,803.7 2,914.6
--------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (Notes 6, 14) (1,618.4) (1,319.0)
Acquisitions (49.0) (29.4)
Proceeds from the sale of property and other assets 14.9 4.5
Change in non-current materials and supplies, purchase of investments and other (22.7) (11.3)
--------------------------------------------------------------------------------------------------------------------------------
Cash used by investing activities (1,675.2) (1,355.2)
--------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 104.5 219.4
Dividends to shareholders (411.7) (312.2)
Purchase of Common Shares and Non-Voting Shares for cancellation (Note 18(f)) (800.2) (892.1)
Long-term debt issued (Note 17) 1,585.9 147.4
Redemptions and repayment of long-term debt (Note 17) (1,314.7) (1,601.1)
Partial payment of deferred hedging liability (Note 17(b)) (309.4) --
Dividends paid by a subsidiary to non-controlling interests (3.0) (7.9)
Other -- (0.8)
--------------------------------------------------------------------------------------------------------------------------------
Cash used by financing activities (1,148.6) (2,447.3)
--------------------------------------------------------------------------------------------------------------------------------
CASH POSITION
Decrease in cash and temporary investments, net (20.1) (887.9)
Cash and temporary investments, net, beginning of period 8.6 896.5
---------------------------------------------------------------------------------------------------------------------------------
Cash and temporary investments, net, end of period $ (11.5)$ 8.6
================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest (paid) (Note 20(c)) $ (516.1)$ (638.3)
================================================================================================================================
Interest received $ 24.2 $ 47.3
================================================================================================================================
Income taxes (inclusive of Investment Tax Credits (Note 9)) received, net $ 98.3 $ 69.5
================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
notes to consolidated financial statements
DECEMBER 31, 2006
TELUS Corporation is one of Canada's largest telecommunications companies,
providing a full range of telecommunications products and services. The Company
is the largest incumbent telecommunications service provider in Western Canada
and also provides data, Internet protocol, voice and wireless services to
Central and Eastern Canada.
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Notes to consolidated financial statements Description
--------------------------------------------------------------------------------------------------------------------------------
General application
--------------------------------------------------------------------------------------------------------------------------------
1. Summary of significant accounting policies Summary review of accounting principles and the methods used in
their application by the Company
2. Accounting policy developments Summary review of forthcoming generally accepted accounting principle
developments that will, or may, affect the Company
3. Capital structure financial policies Summary review of the Company's objectives, policies and processes for
managing its capital structure
4. Regulation of rates charged to customers Summary review of rate regulation impacts on Company operations and
revenues
5. Financial instruments Summary schedule and review of financial instruments, including fair
values thereof
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Consolidated statements of income focused
--------------------------------------------------------------------------------------------------------------------------------
6. Segmented information Summary disclosure of segmented information regularly reported to the
Company's chief operating decision maker
7. Restructuring and workforce reduction costs Summary continuity schedules and review of restructuring and workforce
reduction costs
8. Financing costs Summary schedule of items comprising financing costs by nature
9. Income taxes Summary reconciliations of statutory rate income tax expense to
provision for income taxes and analyses of future income tax asset
and liability
10.Per share amounts Summary schedules and review of numerators and denominators used in
calculating per share amounts and related disclosures
11.Share-based compensation Summary schedules and review of compensation arising from share option
awards, restricted stock units and employee share purchase plan
12.Employee future benefits Summary and review of employee future benefits and related disclosures
--------------------------------------------------------------------------------------------------------------------------------
Consolidated balance sheets focused
--------------------------------------------------------------------------------------------------------------------------------
13.Accounts receivable Summary schedule and review of arm's-length securitization trust
transactions and related disclosures
14.Capital assets Summary schedule of items comprising capital assets
15.Goodwill Summary schedule of goodwill and review of reported fiscal year
acquisitions from which goodwill arises
16.Short-term obligations Summary review of bilateral bank facilities
17.Long-term debt Summary schedule of long-term debt and related disclosures
18.Shareholders' equity Summary schedules and review of shareholders' equity and changes
therein including share option price stratification and normal course
issuer bid summaries
19.Commitments and contingent liabilities Summary review of contingent liabilities, commitments, lease
obligations, guarantees, claims and lawsuits
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Other
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20.Additional financial information Summary schedules of items comprising certain primary financial
statement line items
21.Differences between Canadian and Summary schedules and review of differences between Canadian and
United States generally accepted accounting United States generally accepted accounting principles as they apply to
principles the Company
--------------------------------------------------------------------------------------------------------------------------------
1 summary of significant accounting policies
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada and are
expressed in Canadian dollars.
The terms "TELUS" or "Company" are used to mean TELUS Corporation and,
where the context of the narrative permits, or requires, its subsidiaries.
(a) Consolidation
The consolidated financial statements include the accounts of the Company and
all of the Company's subsidiaries, of which the principal one is TELUS
Communications Inc. TELUS Communications Inc. includes substantially all of
the Company's Wireline segment's operations and all of the Wireless segment's
operations, currently through the TELUS Communications Company partnership and
the TELE-MOBILE COMPANY partnership.
The financing arrangements of the Company and all of its subsidiaries do not
impose restrictions on inter-corporate dividends.
On a continuing basis, TELUS Corporation reviews its corporate organization
and effects changes as appropriate so as to enhance its value. This process
can, and does, affect which of the Company's subsidiaries are considered
principal subsidiaries at any particular point in time.
(b) Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Examples of significant estimates include:
* the key economic assumptions used to determine the fair value of residual
cash flows arising from accounts receivable securitization;
* the allowance for doubtful accounts;
* the allowance for inventory obsolescence;
* the estimated useful lives of assets;
* the recoverability of tangible assets;
* the recoverability of intangible assets with indefinite lives;
* the recoverability of long-term investments;
* the recoverability of goodwill;
* the amount and composition of income tax assets and income tax liabilities,
including the amount of unrecognized tax benefits;
* the accruals for Canadian Radio-television and Telecommunications Commission
("CRTC") deferral account liabilities; and
* certain actuarial and economic assumptions used in determining defined
benefit pension costs, accrued pension benefit obligations and pension plan
assets.
(c) Revenue recognition
The Company earns the majority of its revenue (voice local, voice long
distance, data (including data and information technology managed services)
and wireless network) from access to, and usage of, the Company's
telecommunications infrastructure. The majority of the balance of the Company's
revenue (other and wireless equipment) arises from providing products and
services facilitating access to, and usage of, the Company's telecommunications
infrastructure.
The Company offers complete and integrated solutions to meet its customers'
needs. These solutions may involve the delivery of multiple services and
products occurring at different points in time and/or over different periods
of time. As appropriate, these multiple element arrangements are separated
into their component accounting units, consideration is measured and allocated
amongst the accounting units based upon their relative fair values and then
the Company's relevant revenue recognition polices are applied to the
accounting units.
The Company's revenues are recorded net of any value-added, sales and/or use
taxes billed to the customer concurrent with a revenue-producing transaction.
Voice Local, Voice Long Distance, Data and Wireless Network: The Company
recognizes revenues on the accrual basis and includes an estimate of revenues
earned but unbilled. Wireline and wireless service revenues are recognized
based upon usage of the Company's network and facilities and upon contract
fees.
Advance billings are recorded when billing occurs prior to rendering the
associated service; such advance billings are recognized as revenue in the
period in which the services are provided. Similarly, and as appropriate,
upfront customer activation and connection fees, along with the corresponding
direct costs not in excess of the revenues, are deferred and recognized over
the average expected term of the customer relationship.
When the Company receives no identifiable, separable benefit for
consideration given to a customer (e.g. discounts and rebates), the
consideration is recorded as a reduction of revenue rather than as an expense
as the Company considers this to result in a more appropriate presentation of
transactions in the financial statements.
The Company follows the liability method of accounting for its quality of
service rate rebate amounts that arise from the jurisdiction of the CRTC.
The CRTC has established a portable subsidy mechanism to subsidize Local
Exchange Carriers, such as the Company, that provide residential service to
high cost serving areas. The CRTC has determined the per line/per band
portable subsidy rate for all Local Exchange Carriers. The Company recognizes
the portable subsidy on an accrual basis by applying the subsidy rate to the
number of residential network access lines it has in high cost serving areas.
Differences, if any, between interim and final subsidy rates set by the CRTC,
are accounted for as a change in estimate in the period in which the CRTC
finalizes the subsidy rate.
Other and Wireless Equipment: The Company recognizes product revenues,
including wireless handsets sold to re-sellers and customer premises
equipment, when the products are delivered and accepted by the end-user
customers. Revenues from operating leases of equipment are recognized on a
systematic and rational basis (normally a straight-line basis) over the term
of the lease. When the Company receives no identifiable, separable benefit for
consideration given to a customer (e.g. discounts and rebates), the
consideration is recorded as a reduction of revenue rather than as an expense
as the Company considers this to result in a more appropriate presentation of
transactions in the financial statements.
Non-High Cost Serving Area Deferral Account: On May 30, 2002, and on July 31,
2002, the CRTC issued Decision 2002-34 and Decision 2002-43, respectively,
pronouncements that will affect the Company's wireline revenues for five-year
periods beginning June 1, 2002, and August 1, 2002, respectively. In an effort
to foster competition for residential basic service in non-high cost serving
areas, the concept of a deferral account mechanism was introduced by the CRTC,
as an alternative to mandating price reductions.
The deferral account arises from the CRTC requiring the Company to defer the
income statement recognition of a portion of the monies received in respect of
residential basic services provided to non-high cost serving areas. The
revenue deferral is based on the rate of inflation (as measured by a
chain-weighted Gross Domestic Product Price Index), less a productivity offset
of 3.5%, and an "exogenous factor" that is associated with allowed recoveries
in previous price cap regimes that have now expired. The Company may recognize
the deferred amounts upon the undertaking of qualifying actions, such as
Service Improvement Programs in qualifying non-high cost serving areas, rate
reductions (including those provided to competitors as required in Decision
2002-34 and Decision 2002-43) and/or rebates to customers. To the extent that
a balance remains in the deferral account, interest expense of the Company is
required to be accrued at the Company's short-term cost of borrowing.
--------------------------------------------------------------------------------------------------------------------------------
Price cap factors for price cap years commencing June 1, 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Rate of inflation (as measured by the chain-weighted
Gross Domestic Product Price Index) 3.1% 3.2%
Exogenous factor 0% 0%
--------------------------------------------------------------------------------------------------------------------------------
The Company has adopted the liability method of accounting for the deferral
account. This results in the Company recording a liability to the extent that
activities it has undertaken, realized rate reductions for Competitor Services
and other future qualifying events do not extinguish the balance of the
deferral account, as further discussed in Note 19(a) and quantified in Note
20(b). This also results in the Company continuing to record incremental
liability amounts, subject to reductions for the mitigating activities, for the
remaining duration of the Decisions' four-year periods. Other than for the
interest accrued on the balance of the deferral account, which would be
included in financing costs, substantially all income statement effects of the
deferral account are recorded through operating revenues. The CRTC can direct
that the Company undertake activities drawing down the deferral account that
would not affect the income statement; the financial statement impacts of those
activities would be contingent on what the CRTC directed.
(d) Cost of acquisition and advertising costs
Cost of acquiring customers, which include the total cost of hardware
subsidies, commissions, advertising and promotion related to the initial
customer acquisition, are expensed as incurred and are included in the
Consolidated Statements of Income as a component of "Operations" expense. Costs
of advertising production, airtime and space are expensed as incurred.
(e) Research and development
Research and development costs are expensed except in cases where development
costs meet certain identifiable criteria for deferral. Deferred development
costs are amortized over the life of the commercial production, or in the case
of serviceable property, plant and equipment, are included in the appropriate
property group and are depreciated over its estimated useful life.
(f) Depreciation and amortization
Assets are depreciated on a straight-line basis over their estimated useful
life as determined by a continuing program of studies. Depreciation includes
amortization of assets under capital leases and amortization of leasehold
improvements. Leasehold improvements are normally amortized over the lesser of
their expected average service life or the term of the lease. Intangible assets
with finite lives ("intangible assets subject to amortization") are amortized
on a straight-line basis over their estimated lives; estimated lives are
reviewed at least annually and are adjusted as appropriate. The continuing
program of asset life studies considers such items as timing of technological
obsolescence, competitive pressures and future infrastructure utilization
plans; such considerations could also indicate that carrying values of assets
may not be recoverable. If the carrying values of assets were not considered
recoverable, an impairment provision (measured at the amount by which the
carrying values of the assets exceeds their fair values) would be recorded.
Estimated useful lives for the majority of the Company's capital assets
subject to depreciation and amortization are as follows:
Estimated
useful lives(1)
--------------------------------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunications assets
Outside plant 17 to 40 years
Inside plant 5 to 15 years
Wireless site equipment 6.5 to 8 years
Balance of depreciable property, plant, equipment and other 4 to 20 years
Intangible assets subject to amortization
Subscriber base
Wireline 40 years
Wireless 7 years
Software 3 to 5 years
Access to rights-of-way and other 8 to 30 years
--------------------------------------------------------------------------------------------------------------------------------
(1) The composite depreciation rate for the year ended December 31, 2006, was 6.3% (2005 -- 6.4%).
The rate is calculated by dividing depreciation expense by an average gross book value of depreciable
assets for the reporting period. A result of this methodology is that the composite depreciation rate
will be lower in a period that has a higher proportion of fully depreciated assets remaining in use.
The Company chose to depreciate and amortize its assets on a straight-line
basis as it believes that this method better reflects the consumption of
resources related to the economic lifespan of the assets than use of an
accelerated method and thus is more representative of the economic substance of
the underlying use of the assets.
The carrying value of intangible assets with indefinite lives, and goodwill,
are periodically tested for impairment using a two-step impairment test. The
frequency of the impairment test generally is the reciprocal of the stability
of the relevant events and circumstances, but intangible assets with indefinite
lives and goodwill must, at a minimum, be tested annually; the Company has
selected December as its annual test time. No impairment amounts arose from the
December 2006 and December 2005 annual tests. The test is applied to each of
the Company's two reporting units (the reporting units being identified in
accordance with the criteria in the Canadian Institute of Chartered Accountants
("CICA") Handbook section for intangible assets and goodwill): Wireline and
Wireless.
The Company assesses its goodwill by applying the prescribed method of
comparing the fair value of its reporting units to the carrying amounts of its
reporting units. Consistent with current industry-specific valuation methods,
a combination of the discounted cash flow approach, the market comparable
approach and analytical review of industry and Company-specific facts is used
in determining the fair value of the Company's reporting units.
(g) Translation of foreign currencies
Trade transactions completed in foreign currencies are translated into Canadian
dollars at the rates prevailing at the time of the transactions. Monetary
assets and liabilities denominated in foreign currencies are translated into
Canadian dollars at the rate of exchange in effect at the balance sheet date
with any resulting gain or loss being included in the Consolidated Statements
of Income, as set out in Note 8. Hedge accounting is applied in specific
instances as further discussed in Note 1(h).
The Company has a minor foreign subsidiary that is considered to be
self-sustaining. Accordingly, foreign exchange gains and losses arising from
the translation of the minor foreign subsidiary's accounts into Canadian
dollars are deferred and reported as cumulative foreign currency translation
adjustment in the equity section of the Consolidated Balance Sheets, as set
out in Note 18(a) and discussed further in Note 2(b).
(h) Hedge accounting
General: The Company applies hedge accounting to the financial instruments
used to:
* establish designated currency hedging relationships for its U.S. Dollar
denominated long-term debt future cash outflows (semi-annual interest payments
and principal payments at maturity), as set out in Note 5 and further
discussed in Note 17(b);
* forward starting interest rate swap agreements, as further discussed in Note
5;
* fix the compensation cost arising from specific grants of restricted stock
units, as set out in Note 5 and further discussed in Note 12(c); and
* for certain U.S. Dollar denominated future purchase commitments, as set out
in Note 5.
Hedge accounting: The purpose of hedge accounting, in respect of the
Company's designated hedging relationships, is to ensure that counterbalancing
gains and losses are recognized in the same periods. The Company chose to
apply hedge accounting, as it believes this is more representative of the
economic substance of the underlying transactions.
In order to apply hedge accounting, a high correlation (which indicates
effectiveness) is required in the offsetting changes in the values of the
financial instruments (the "hedging items") used to establish the designated
hedging relationships and all, or a part, of the asset, liability or
transaction having an identified risk exposure that the Company has taken
steps to modify (the "hedged items"). The Company assesses the anticipated
effectiveness of designated hedging relationships at inception and for each
reporting period thereafter. A designated hedging relationship is considered
effective by the Company if the following critical terms match between the
hedging item and the hedged item: the notional amount of the hedging item and
the principal of the hedged item; maturity dates; payment dates; and interest
rate index (if, and as, applicable). Any ineffectiveness, such as from a
difference between the notional amount of the hedging item and the principal
of the hedged item, or if a previously effective designated hedging
relationship becomes ineffective, is reflected in the Consolidated Statements
of Income as "Financing costs" if in respect of long-term debt or U.S. Dollar
denominated temporary investments and as "Operations" expense if in respect of
share-based compensation or U.S. Dollar denominated future purchase
commitments.
Deferred hedging assets and liabilities: In the application of hedge
accounting to U.S. Dollar denominated long-term debt future cash outflows, an
amount (the "hedge value") is recorded in respect of the fair value of the
hedging items only to the extent that their value counterbalances the
difference between the Canadian dollar equivalent of the value of the hedged
items at the rate of exchange at the balance sheet date and the Canadian
dollar equivalent of the value of the hedged items at the rate of exchange in
the hedging items.
In the application of hedge accounting to the compensation cost arising from
share-based compensation, an amount (the "hedge value") is recorded in respect
of the fair value of the hedging items only to the extent that their value
counterbalances the difference between the quoted market price of the
Company's Common Shares and/or Non-Voting Shares at the balance sheet date and
the price of the Company's Common Shares and/or Non-Voting Shares in the
hedging items.
(i) Income taxes
The Company follows the liability method of accounting for income taxes. Under
this method, current income taxes are recognized for the estimated income
taxes payable for the current year. Future income tax assets and liabilities
are recognized for temporary differences between the tax and accounting bases
of assets and liabilities as well as for the benefit of losses available to be
carried forward to future years for tax purposes that are more likely than not
to be realized based upon the expected timing of the reversal of such
temporary differences, or usage of such tax losses, and application of the
substantively enacted tax rates at the time of such reversal or usage.
The operations of the Company are complex, and related tax interpretations,
regulations and legislation are continually changing. As a result, there are
usually some tax matters in question that result in uncertain tax positions.
The Company only recognizes the income tax benefit of an uncertain tax
position when it is more likely than not that the ultimate determination of
the tax treatment of the position will result in that benefit being realized.
The Company accrues for interest charges on current tax liabilities that have
not been funded, which would include interest and penalties arising from
uncertain tax positions. The Company includes such charges as a component of
financing costs.
The Company's research and development activities may be eligible to earn
Investment Tax Credits; the determination of eligibility is a complex matter.
The Company only recognizes the Investment Tax Credits when it is more likely
than not that the ultimate determination of the eligibility of the Company's
research and development activities will result in the Investment Tax Credits
being received. When it is more likely than not that the Investment Tax
Credits will be received, they are accounted for using the cost reduction
method whereby such credits are deducted from the expenditures or assets to
which they relate, as set out in Note 9.
(j) Share-based compensation
Canadian GAAP requires, for share options granted after 2001, that a fair
value be determined for share options at the date of grant and that such fair
value be recognized in the financial statements. Proceeds arising from the
exercise of share options are credited to share capital.
In respect of restricted stock units, as set out in Note 11(c), the Company
accrues a liability equal to the product of the vesting restricted stock units
multiplied by the fair market value of the corresponding shares at the end of
the reporting period (unless hedge accounting is applied, as set out in Note
1(h)). The expense for restricted stock units that are forfeited or cancelled
is reversed against the expense that had been recorded up to the date of
forfeiture or cancellation.
When share-based compensation vests in one amount at a future point in time
("cliff vesting"), the expense is recognized by the Company in the
Consolidated Statements of Income on a straight-line basis over the vesting
period. When share-based compensation vests in tranches ("graded vesting"),
the expense is recognized by the Company in the Consolidated Statements of
Income using the accelerated expense attribution method.
(k) Employee future benefit plans
The Company accrues its obligations under employee defined benefit plans, and
the related costs, net of plan assets. The cost of pensions and other
retirement benefits earned by employees is actuarially determined using the
projected benefit method pro-rated on service and management's best estimate
of expected plan investment performance, salary escalation and retirement ages
of employees. For the purpose of calculating the expected return on plan
assets, those assets are valued at fair value. The excess of the net actuarial
gain (loss) over 10% of the greater of the benefit obligation and the fair
value of the plan assets is amortized over the average remaining service
period of active employees of the plan, as are past service costs and
transitional assets and liabilities.
The Company uses defined contribution accounting for the Telecommunication
Workers Pension Plan and the British Columbia Public Service Pension Plan that
cover certain of the Company's employees.
(l) Cash and temporary investments, net
Cash and temporary investments, which include investments in money market
instruments that are purchased three months or less from maturity, are
presented net of outstanding items including cheques written but not cleared
by the bank as at the balance sheet date. Cash and temporary investments, net,
are classified as a liability on the balance sheet when the amount of the
cheques written but not cleared by the bank exceeds the amount of the cash and
temporary investments. When cash and temporary investments, net, are
classified as a liability, they may also include overdraft amounts drawn on
the Company's bilateral bank facilities, which revolve daily and are discussed
further in Note 16.
(m) Sales of receivables
Transfers of receivables in securitization transactions are recognized as
sales when the Company is deemed to have surrendered control over the
transferred receivables and consideration, other than for its beneficial
interests in the transferred receivables, has been received. When the Company
sells its receivables, it retains reserve accounts, which are retained
interests in the securitized receivables, and servicing rights. When a
transfer is considered a sale, the Company derecognizes all receivables sold,
recognizes at fair value the assets received and the liabilities incurred and
records the gain or loss on sale in the Consolidated Statements of Income as
"Other expense, net". The amount of gain or loss recognized on the sale of
receivables depends in part on the previous carrying amount of the receivables
involved in the transfer, allocated between the receivables sold and the
retained interests based upon their relative fair market value at the sale
date. The Company estimates the fair value for its retained interests based on
the present value of future expected cash flows using management's best
estimates of the key assumptions (credit losses, the weighted average life of
the receivables sold and discount rates commensurate with the risks involved).
(n) Inventories
The Company's inventory consists primarily of wireless handsets, parts and
accessories and communications equipment held for resale. Inventories are
valued at the lower of cost and net realizable value, with cost being
determined on an average cost basis. Prior to 2006, inventories of wireless
handsets, parts and accessories were valued at the lower of cost and
replacement cost, with cost being determined on an average cost basis; the
Company was not materially affected by the change in valuation method, which
was prospectively applied.
(o) Capital assets
General: Capital assets are recorded at historical cost and, with respect to
self-constructed property, plant, equipment and other, include materials,
direct labour and applicable overhead costs. With respect to
internally-developed, internal-use software, recorded historical costs include
materials, direct labour and direct labour-related costs. Where property,
plant, equipment and other construction projects exceed $50 million and are of
a sufficiently long duration (generally, longer than twelve months), an amount
is capitalized for the cost of funds used to finance construction. The rate
for calculating the capitalized financing costs is based on the Company's
one-year cost of borrowing.
When property, plant and/or equipment are sold by the Company, the historical
cost less accumulated depreciation is netted against the sale proceeds and the
difference is included in the Consolidated Statements of Income as "Other
expense, net".
Asset retirement obligations: Liabilities are recognized for statutory,
contractual or legal obligations, normally when incurred, associated with the
retirement of property, plant and equipment (primarily certain items of
outside plant and wireless site equipment) when those obligations result from
the acquisition, construction, development or normal operation of the assets.
The obligations are measured initially at fair value, determined using present
value methodology, and the resulting costs capitalized into the carrying
amount of the related asset. In subsequent periods, the liability is adjusted
for the accretion of discount and any changes in the amount or timing of the
underlying future cash flows. The capitalized asset retirement cost is
depreciated on the same basis as the related asset and the discount accretion
is included in determining the results of operations.
(p) Leases
Leases are classified as capital or operating depending upon the terms and
conditions of the contracts.
Where the Company is the lessee, asset values recorded under capital leases
are amortized on a straight-line basis over the period of expected use.
Obligations recorded under capital leases are reduced by lease payments net of
imputed interest.
For the year ended December 31, 2006, real estate and vehicle operating lease
expenses, which are net of the amortization of the deferred gain on the
sale-leaseback of buildings, were $178.1 million (2005 -- $165.1 million). The
unamortized balances of the deferred gains on the sale-leaseback of buildings
are set out in Note 20(b).
(q) Investments
The Company accounts for its investments in companies over which it has
significant influence using the equity basis of accounting whereby the
investments are initially recorded at cost and subsequently adjusted to
recognize the Company's share of earnings or losses of the investee companies
and reduced by dividends received. The excess of the cost of equity
investments over the underlying book value at the date of acquisition, except
for goodwill, is amortized over the estimated useful lives of the underlying
assets to which it is attributed.
The Company accounts for its other investments using the cost basis of
accounting whereby investments are initially recorded at cost and earnings
from such investments are recognized only to the extent received or
receivable.
Carrying values of equity and cost investments are reduced to estimated
market values if there is other than a temporary decline in the value of the
investment; such reduction recorded is included in the Consolidated Statements
of Income as "Other expense, net".
(r) Comparative amounts
Certain of the comparative amounts have been reclassified to conform to the
presentation adopted currently.
2 accounting policy developments
(a) Convergence with International Financial Reporting Standards
In 2006, Canada's Accounting Standards Board ratified a strategic plan that
will result in Canadian GAAP, as used by public companies, being converged
with International Financial Reporting Standards over a transitional period
currently expected to be approximately five years. The precise timing of
convergence will depend on an Accounting Standards Board "progress review" to
be undertaken by early 2008.
Canadian GAAP will be converged with International Financial Reporting
Standards through a combination of two methods: as current joint-convergence
projects of the United States' Financial Accounting Standards Board and the
International Accounting Standards Board are agreed upon, they will be adopted
by Canada's Accounting Standards Board and may be introduced in Canada before
the complete changeover to International Financial Reporting Standards; and
standards not subject to a joint-convergence project will be exposed in an
omnibus manner.
As this convergence initiative is very much in its infancy as of the date of
these consolidated financial statements, it would be premature to currently
assess the impact of the initiative, if any, on the Company.
(b) Comprehensive income
Commencing with the Company's 2007 fiscal year, the new recommendations of the
CICA for accounting for comprehensive income (CICA Handbook Section 1530), for
the recognition and measurement of financial instruments (CICA Handbook
Section 3855) and for hedges (CICA Handbook Section 3865) will apply to the
Company. In the Company's specific instance, the transitional rules for these
sections require prospective implementation at the beginning of a fiscal year
(the exception being in respect of the cumulative foreign currency translation
adjustment, which is retroactively adjusted for at the beginning of the fiscal
year of adoption). Currently, the concept of comprehensive income for purposes
of Canadian GAAP, in the Company's specific instance, will be primarily to
include changes in shareholders' equity arising from unrealized changes in the
fair values of financial instruments.
The majority of the impact on the Company of adopting the other comprehensive
income and related standards currently arises from the Company's cross
currency interest rate swap agreements, as discussed further in Note 5 and
Note 17(b) and, to a lesser extent, the cash-settled equity forward agreements
that the Company entered into in respect of share-based compensation, as
discussed further in Note 5 and Note 11(c).
In the application of hedge accounting to U.S. Dollar denominated long-term
debt future cash outflows, an amount (the "hedge value") is recorded in the
Consolidated Balance Sheets in respect of the value of the hedging items. The
difference between the hedge value that would be recorded on the consolidated
balance sheet subsequent to, and prior to, the adoption of the new CICA
recommendations, in respect of the U.S. Dollar denominated long-term debt
future cash flows, is the difference between the fair value of the hedging
items and the hedging asset or liability necessary to recognized the Canadian
dollar equivalent of the value of the hedged items at the rate of exchange in
the hedging items.
Comprehensive income as prescribed by U.S. GAAP, and which is disclosed in
Note 21(h), is largely aligned with comprehensive income as prescribed by
Canadian GAAP, including the impacts of the new recommendations for the
recognition and measurement of financial instruments and for hedges. The
magnitude of the impacts on the Company of adopting the new recommendations
would not differ materially from the impacts reflected in Note 21(h), other
than for pension accounting impacts. In the Company's specific instance there
is currently a difference in other comprehensive income in that U.S. GAAP
includes, in respect of pension and other defined benefit plans, the
difference between the net funded status of the plans and the net accrued
benefit asset or liability; Canadian GAAP does not include this currently, but
an exposure draft from Canada's Accounting Standards Board is expected in the
first half of 2007 that would eliminate this difference.
(c) Accounting changes
Commencing with the Company's 2007 fiscal year, the new recommendations of the
CICA for accounting changes (CICA Handbook Section 1506) will apply to the
Company. Most significantly, the new recommendations stipulate that voluntary
changes in accounting policy are made only if they result in the financial
statements providing reliable and more relevant information and that new
disclosures are required in respect of changes in accounting policies, changes
in accounting estimates and correction of errors. The Company is not currently
materially affected by the new recommendations.
(d) Business combinations
Possibly commencing in the Company's 2007 fiscal year, the proposed amended
recommendations of the CICA for accounting for business combinations will
apply to the Company's business combinations, if any, with an acquisition date
subsequent to the amended recommendations coming into force. Whether the
Company would be materially affected by the proposed amended recommendations
would depend upon the specific facts of the business combinations, if any,
occurring subsequent to the amended recommendations coming into force.
Generally, the proposed recommendations will result in measuring business
acquisitions at the fair value of the acquired entities and a prospectively
applied shift from a parent company conceptual view of consolidation theory
(which results in the parent company recording the book values attributable to
non-controlling interests) to an entity conceptual view (which results in the
parent company recording the fair values attributable to non-controlling
interests).
(e) Capital structure financial policies
Effective December 31, 2006, the Company early adopted the new recommendations
of the CICA for disclosure of the Company's objectives, policies and processes
for managing capital (CICA Handbook Section 1535), as discussed further in
Note 3.
(f) Financial instruments -- disclosure and presentation
Commencing with the Company's 2008 fiscal year, the new recommendations of the
CICA for financial instrument disclosures and presentation (CICA Handbook
Section 3862) will apply to the Company. The new recommendations will result
in incremental disclosures, relative to those currently, with an emphasis on
risks associated with both recognized and unrecognized financial instruments
to which an entity is exposed during the period and at the balance sheet date,
and how an entity manages those risks. The Company is assessing how it will be
affected by these new recommendations.
(g) Earnings per share
Amendments were proposed to the recommendations of the CICA for the
calculation and disclosure of earnings per share (CICA Handbook Section 3500);
such amendments had progressed to the typescript stage. In July 2006, the
typescript with the proposed amendments, which would have applied to the
Company, was withdrawn and an announcement was made indicating that an
International Financial Reporting Standards-based exposure draft from Canada's
Accounting Standards Board would be issued at a later date, now expected in
the first half of 2007.
3 capital structure financial policies
The Company's objectives when managing capital are: (i) to maintain a flexible
capital structure which optimizes the cost of capital at acceptable risk; and
(ii) to manage capital in a manner which balances the interests of equity and
debt holders.
In the management of capital, the Company includes shareholders' equity
(excluding accumulated other comprehensive income), long-term debt (including
any associated hedging assets or liabilities, net of amounts recognized in
accumulated other comprehensive income), cash and temporary investments and
securitized accounts receivable in the definition of capital.
The Company manages the capital structure and makes adjustments to it in the
light of changes in economic conditions and the risk characteristics of the
underlying assets. In order to maintain or adjust the capital structure, the
Company may adjust the amount of dividends paid to shareholders, purchase
shares for cancellation pursuant to normal course issuer bids, issue new
shares, issue new debt, issue new debt to replace existing debt with different
characteristics and/or increase or decrease the amount of sales of trade
receivables to an arm's-length securitization trust.
The Company monitors capital on a number of bases, including: net debt to
total capitalization; net debt to Earnings Before Interest, Taxes,
Depreciation and Amortization -- excluding restructuring and workforce
reduction costs ("EBITDA -- excluding restructuring and workforce reduction
costs"); and dividend payout ratio of sustainable net earnings.
Net debt to total capitalization is calculated as net debt divided by total
capitalization. Net-debt is a non-GAAP measure, whose nearest GAAP measure is
long-term debt; the calculation of net-debt is as set out in the following
schedule. Net debt, before addition of securitized accounts receivable, is one
component of a ratio used to determine compliance with debt covenants. Total
capitalization is defined as the sum of net debt, non-controlling interest and
shareholders' equity (excluding accumulated other comprehensive income).
Net debt to EBITDA -- excluding restructuring and workforce reduction costs
is calculated as net-debt at the end of the period divided by twelve-month
trailing EBITDA -- excluding restructuring and workforce reduction costs. The
calculation of EBITDA -- excluding restructuring and workforce reduction costs
is a non-GAAP measure whose nearest GAAP measure is net income; the
calculation of EBITDA -- excluding restructuring and workforce reduction costs
is as set out in the following schedule. This measure, historically, is
substantially the same as the leverage ratio covenant in the Company's credit
facilities.
Dividend payout ratio of sustainable net earnings is calculated as the most
recent quarterly dividend declared per share multiplied by four and divided by
basic earnings per share for the twelve-month trailing period.
During 2006, the Company's strategy, which was unchanged from 2005, was to
maintain the liquidity measures set out in the following schedule. The Company
believes that these liquidity measure targets are currently at the optimal
level and provide access to capital at a reasonable cost by maintaining credit
ratings in the range of BBB+ to A-, or the equivalent.
Liquidity measure
As at, or years ended, December 31 ($ in millions) targets 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Components of debt and coverage ratios
Net debt (including securitized accounts receivable)(1) $ 6,278.1 $ 6,294.4
Total capitalization -- book value $ 13,229.8 $ 12,690.0
EBITDA -- excluding restructuring and workforce reduction costs(2) $ 3,658.1 $ 3,349.2
Net interest cost(3) $ 504.7 $ 623.1
Debt ratios
Net debt to total capitalization 45 -- 50% 47.5% 47.7%
Net debt to EBITDA -- excluding restructuring and workforce
reduction costs 1.5:1 -- 2.0:1 1.7 1.9
Coverage ratios
Interest coverage on long-term debt(4) 3.9 2.5
EBITDA -- excluding restructuring and workforce reduction costs
interest coverage(5) 7.2 5.4
Other measures
Dividend payout ratio of sustainable net earnings 45 -- 55% 46% 56%
--------------------------------------------------------------------------------------------------------------------------------
(1) Net debt is calculated as follows:
As at December 31 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Long-term debt (Note 17) $ 4,928.1 $ 4,644.9
Deferred hedging liability, net 838.5 1,158.1
--------------------------------------------------------------------------------------------------------------------------------
5,766.6 5,803.0
Cash and temporary investments, net 11.5 (8.6)
Securitized accounts receivable (Note 13) 500.0 500.0
--------------------------------------------------------------------------------------------------------------------------------
Net debt $ 6,278.1 $ 6,294.4
================================================================================================================================
(2) EBITDA -- excluding restructuring and workforce reduction
costs is calculated as follows:
Years ended December 31 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
EBITDA (see Note 6) $ 3,590.3 $ 3,295.3
Restructuring and workforce reduction costs (Note 7) 67.8 53.9
---------------------------------------------------------------------------------------------------------------------------------
EBITDA -- excluding restructuring and workforce reduction costs $ 3,658.1 $ 3,349.2
================================================================================================================================
(3) Net interest cost is defined as financing costs before gains on redemption
and repayment of debt, calculated on a twelve-month trailing basis (losses
recorded on the redemption of long-term debt are included in net interest
cost).
(4) Interest coverage on long-term debt is defined as net income before
interest expense on long-term debt and income tax expense, divided by interest
expense on long-term debt (including losses recorded on the redemption of
long-term debt).
(5) EBITDA -- excluding restructuring and workforce reduction costs interest
coverage is defined as EBITDA -- excluding restructuring and workforce
reduction costs divided by net interest cost. This measure is substantially
the same as the coverage ratio covenant in the Company's credit facilities.
As net debt was comparable year-over-year, the increase in total
capitalization is attributed to an increase in shareholders' equity (mainly
increased retained earnings net of lower share capital, which was due
primarily to share repurchases under normal course issuer bid share repurchase
programs, as further discussed in Note 18(f)).
The net debt to EBITDA -- excluding restructuring and workforce reduction
costs ratio measured at December 31, 2006, improved as a result of increased
EBITDA -- excluding restructuring and workforce reduction costs.
Interest coverage on long-term debt improved by 0.9 because of lower interest
expenses and improved by 0.5 because of increased income before taxes and
interest expense. The EBITDA -- excluding restructuring and workforce reduction
costs interest coverage ratio improved by 1.3 due to lower net interest cost
and improved by 0.5 due to higher EBITDA -- excluding restructuring and
workforce reduction costs.
The dividend payout ratio for the twelve-month period ended December 31, 2006,
was near the low end of the target guideline of 45 to 55% for sustainable net
earnings due mainly to actual earnings including positive impacts from tax rate
changes and tax recoveries that were unique to 2006. The dividend payout ratio
was 54% when calculated excluding these 2006 income tax items. The dividend
payout ratio for the twelve-month period ending December 31, 2005, was higher
than the target guideline due primarily to actual earnings including after-tax
labour negotiations-related emergency operations procedures expenses.
4 regulation of rates charged to customers
(a) General
The provision of telecommunications services by the Company through TELUS
Communications Company partnership and the TELE-MOBILE COMPANY partnership is
subject to regulation under provisions of the Telecommunications Act. The
regulatory authority designated to implement the Telecommunications Act is the
CRTC, which is established pursuant to the terms of the Canadian
Radio-television and Telecommunications Act.
Pursuant to Part III of the Telecommunications Act, the CRTC may forbear,
conditionally or unconditionally, from regulating the rates for certain
telecommunications services, or certain classes of telecommunications service
providers, where the CRTC finds that the service or class of service provided
by the telecommunications service provider is subject to competition sufficient
to protect the interests of customers. The TELE-MOBILE COMPANY partnership has,
for example, been granted forbearance from regulation in relation to its entire
portfolio of wireless and paging services. TELUS Communications Inc., in
comparison, has been granted forbearance in relation to the setting of rates
for a number of its wireline telecommunications services, including
interexchange voice services, wide area network services and retail Internet
services. TELUS Communications Inc. also operates as a forborne
telecommunications service provider when it provides telecommunications
services (primarily business local exchange service) outside of its traditional
incumbent serving territory (Alberta, British Columbia and parts of Quebec)
and, as such, all of its services are not subject to rate regulation.
The fact that a portion of the Company's operations remain subject to rate
regulation does not result in the Company selecting accounting policies that
would differ from generally accepted accounting principles.
Less than one-third of the Company's revenues are from Wireline segment
regulated services and subject to CRTC price regulation; none of the Company's
Wireless segment revenues are currently subject to CRTC regulation.
The major categories of telecommunications services provided by TELUS
Communications Inc. that are subject to rate regulation or have been forborne
from rate regulation are as follows:
Regulated services Forborne services (not subject to rate regulation)
---------------------------------------------------------------------------------------------------------------------------------
* Residential wireline services in incumbent local * Non-incumbent local exchange carrier services
exchange carrier regions * Long distance services
* Business wireline services in incumbent local * Internet services
exchange carrier regions * International telecommunications services(1)
* Competitor services * Interexchange private line services
* Public telephone services * Certain data services
* Cellular, enhanced specialized mobile radio digital
("ESMR digital") and personal communications
services digital ("PCS digital")
* Other wireless services, including paging
* Sale of customer premises equipment ("CPE")
--------------------------------------------------------------------------------------------------------------------------------
(1) Forborne on routes where one or more competitors are offering or providing services
at DS-3 or greater bandwidth.
(b) Price caps form of regulation
The CRTC has adopted a form of price cap regulation as the means by which it
regulates the prices for the Company's telecommunications rate regulated
services. The current four-year price regulation regime commenced on June 1,
2002, with the issuance of the CRTC's Decision 2002-34. On December 16, 2005,
the CRTC issued Decision 2005-69 that extended the current price cap regime,
without changes, for a period of one year to May 31, 2007. The CRTC conducted
a review of the existing price cap regulation which included an oral hearing
held in Gatineau, Quebec. This proceeding was concluded in the fourth quarter
of 2006 and the Company anticipates the CRTC will issue its decision in this
matter in mid-2007. The Company will account for any necessary changes arising
from this proceeding on a prospective basis.
Rate-setting methodology: Under the current price regulation framework,
services are separated into seven service categories, or "baskets". While the
Company has a degree of flexibility to raise and lower rates in response to
market pressures, prices within baskets are capped using a formula that
depends on the relationship between the inflation rate (as measured by the
chain-weighted Gross Domestic Product Price Index) and an estimate of the
telephone companies' productivity gains, which the CRTC has set at 3.5% for
each of the four years of the current price cap regime, and subsequent
one-year extension period, irrespective of the unique operating conditions of
each telephone company. On average, rates for basic residential services
should not increase unless inflation goes above 3.5% whereas business services
rates are allowed to increase, on average, by the annual inflation rate.
Specific details on price cap constraints are as follows:
Price cap constraint
------------------------------------------------------------------------------
Inflation less Overriding
3.5% maximum
productivity Deferral annual
Capped basket Inflation offset account(1) increase
---------------------------------------------------------------------------------------------------------------------------------
Residential wireline services in incumbent
local exchange carrier regions
In non-high cost serving areas X X 5%(2)
In high cost serving areas X 5%(2)
Business wireline services in incumbent
local exchange carrier regions X 10%
Other capped services X
Competitor services X
Public telephone services 0%(3)
Services with frozen rates (e.g. 9-1-1 service) 0%
---------------------------------------------------------------------------------------------------------------------------------
(1) When inflation is less than 3.5%, an amount equal to the revenue reduction
otherwise required by the pricing constraint, but not implemented, will be
placed in the deferral account (see Note 1(c), Note 19(a) and Note 20(b)). The
Company may subsequently recognize the deferred amounts upon the undertaking
of qualifying actions, such as Service Improvement Programs in qualifying
non-high cost serving areas, rate reductions (including those mandatorily
provided to competitors) and/or rebates to customers. The deferral account is
the most significant obligation recorded on the Consolidated Balance Sheets
that arises from the CRTC's regulatory authority.
(2) For residential optional features, the maximum annual increase is $1 per
feature, excepting service bundles.
(3) The rates for payphone services will remain at current levels until the
CRTC reviews payphone service policy issues.
(c) Other non-price cap regulation
Other: The CRTC has adopted an imputation test filing requirement to set floor
prices for rate regulated services. The imputation test filing requirements
ensure that the incumbent telephone companies do not reduce rates for services
below their costs in an effort to thwart competitive entry or engage in
predatory pricing to drive out existing competitors.
Unbundling of essential facilities: In an effort to foster facilities-based
competition in the provision of telecommunications services, the CRTC has
mandated that certain essential or near-essential facilities be made available
to competitors at rates based on their incremental costs plus an approved
mark-up. The CRTC has defined essential facilities as facilities which are
monopoly controlled, required by competitors as an input to provide services
and which cannot be economically or technically duplicated by competitors
(which include central office codes, subscriber listings and certain local
loops in high-cost serving areas). The incumbent local exchange carriers must
provide certain non-essential facilities, which the CRTC deems to be near
essential, such as local loop facilities in low cost areas and transiting
arrangements, at prices determined as if they were essential facilities. This
obligation on the part of the incumbent local exchange carriers will continue
until the market for near essential loops and transiting arrangements is
competitive.
Voice contribution expense and portable subsidy revenue: Local exchange
carriers' costs of providing the level of basic residential services that the
CRTC requires to be provided in high cost serving areas is more than the CRTC
allows the local exchange carriers to charge for the level of service. To
ameliorate the situation, the CRTC collects contribution payments, in a
central fund, from all Canadian telecommunications service providers (including
voice, data and wireless service providers) that are then disbursed as
portable subsidy payments to subsidize the costs of providing residential
telephone services in high cost serving areas. The portable subsidy payments
are paid based upon a total subsidy requirement calculated on a per line/per
band subsidy rate, as further discussed in Note 1(c). The CRTC currently
determines, at a national level, the total contribution requirement necessary
to pay the portable subsidies and then collects contribution payments from the
Canadian telecommunications service providers, calculated as a percentage of
their telecommunications service revenue (as defined in CRTC Decision 2000 --
745 and Telecom Order CRTC 2001-220). The final contribution expense rate for
2006 is 1.03% and the interim rate for 2007 has been similarly set at 1.03%.
The Company's contributions to the central fund, $65.9 million for the year
ended December 31, 2006 (2005 -- $63.0 million), are accounted for as an
operations expense and the portable subsidy receipts, $63.2 million for the
year ended December 31, 2006 (2005 -- $72.2 million), are accounted for as
local revenue.
5 financial instruments
The Company's financial instruments consist of cash and temporary investments,
accounts receivable, investments accounted for using the cost method, as
further discussed in Note 1(p), accounts payable, restructuring and workforce
reduction accounts payable, short-term obligations, long-term debt, interest
rate swap agreements, share-based compensation cost hedges, as further
discussed in Note 11(b)-(c), and foreign exchange hedges.
The Company uses various financial instruments, the fair values of some which
are not reflected on the balance sheets, to reduce or eliminate exposure to
interest rate and foreign currency risks and to reduce or eliminate exposure
to increases in the compensation cost arising from certain forms of
share-based compensation; effective January 1, 2007, the fair values of all
such financial instruments will be reflected on the consolidated balance
sheets, as further discussed in Note 2(b). These instruments are accounted for
on the same basis as the underlying exposure being hedged. The majority of the
notional value of these instruments was added during 2001 and pertains to
TELUS' U.S. Dollar borrowing. During the second quarter of 2006, as further
discussed in Note 17(b), the Company terminated a number of cross currency
interest rate swap agreements and entered into new cross currency interest
rate swap agreements in respect of the Company's U.S. Dollar Notes maturing in
June 2007.
Use of these instruments is subject to a policy, which requires that no
derivative transaction be entered into for the purpose of establishing a
speculative or a levered position, and sets criteria for the creditworthiness
of the transaction counterparties.
Price risk -- interest rate: The Company is exposed to interest rate risk
arising from fluctuations in interest rates on its temporary investments,
short-term obligations and long-term debt.
In contemplation of the planned refinancing of the debt maturing June 1,
2007,as set out in Note 17, the Company has entered into forward starting
interest rate swap agreements that, as at December 31, 2006, have the effect
of fixing the underlying interest rate on up to $500 million of replacement
debt. Hedge accounting has been applied to these forward starting interest
rate swap agreements.
Price risk -- currency: The Company is exposed to currency risks arising
from fluctuations in foreign exchange rates on its U.S. Dollar denominated
long-term debt. Currency hedging relationships have been established for the
related semi-annual interest payments and principal payments at maturity, as
further discussed in Note 1(h) and set out in Note 17(b).
The Company's foreign exchange risk management also includes the use of
foreign currency forward contracts to fix the exchange rates on short-term
foreign currency transactions and commitments. Hedge accounting is applied to
these short-term foreign currency forward contracts on an exception basis
only.
As at December 31, 2006, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rates on U.S.$13
million of fiscal 2007 purchase commitments; hedge accounting has been applied
to these foreign currency forward contracts, all of which relate to the
Wireless segment.
Price risk -- other: The Company is exposed to a market risk with respect to
its short-term investments in that the fair value will fluctuate because of
changes in market prices.
Credit risk: The Company is exposed to credit risk with respect to its
short-term deposits, accounts receivable, interest rate swap agreements and
foreign exchange hedges.
Credit risk associated with short-term deposits is minimized substantially
by ensuring that these financial assets are placed with governments,
well-capitalized financial institutions and other creditworthy counterparties.
An ongoing review is performed to evaluate changes in the status of
counterparties.
Credit risk associated with accounts receivable is minimized by the
Company's large customer base, which covers substantially all consumer and
business sectors in Canada. The Company follows a program of credit
evaluations of customers and limits the amount of credit extended when deemed
necessary. The Company maintains provisions for potential credit losses, and
any such losses to date have been within management's expectations.
Counterparties to the Company's interest rate swap agreements, foreign
exchange hedges and share-based compensation cost hedges are major financial
institutions that have all been accorded investment grade ratings by a primary
rating agency. The dollar amount of credit exposure under contracts with any
one financial institution is limited and counterparties' credit ratings are
monitored. The Company does not give or receive collateral on swap agreements
and hedges due to its credit rating and those of its counterparties. While the
Company is exposed to credit losses due to the nonperformance of its
counterparties, the Company considers the risk of this remote; if all
counterparties were not to perform, the pre-tax effect would be limited to the
value of any deferred hedging assets.
Fair value: The carrying value of cash and temporary investments, accounts
receivable, accounts payable, restructuring and workforce reduction accounts
payable and short-term obligations approximates their fair values due to the
immediate or short-term maturity of these financial instruments. The carrying
values of the Company's investments accounted for using the cost method would
not exceed their fair values.
The fair values of the Company's long-term debt are estimated based on quoted
market prices for the same or similar issues or on the current rates offered
to the Company for debt of the same maturity as well as the use of discounted
future cash flows using current rates for similar financial instruments
subject to similar risks and maturities. The fair values of the Company's
derivative financial instruments used to manage exposure to interest rate and
currency risks are estimated similarly.
The fair values of the Company's derivative financial instruments used to
manage exposure to increases in compensation costs arising from certain forms
of share-based compensation are estimated based upon fair value estimates of
the related cash-settled equity forward agreements provided by the
counterparty to the transactions.
As at December 31 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Hedging item
maximum Carrying Carrying
(millions) maturity date amount Fair value amount Fair value
--------------------------------------------------------------------------------------------------------------------------------
Assets
Derivatives(1)(2) used to manage
changes in compensation costs
arising from restricted stock
units (Note 11(c)) November 2008 $ 6.0 $ 11.4 $ 12.2 $ 19.5
=================================================================================================================================
Derivatives(1)(2) used to manage
currency risks arising from U.S.
Dollar denominated purchases to
which hedge accounting is
- Applied March 2007 $ -- $ 0.5 $ -- $ --
- Not applied December 2007 $ -- $ 5.6 $ -- $ --
=================================================================================================================================
Liabilities
Long-term debt
Principal (Note 17) $ 4,928.1 $ 5,535.9 $ 4,644.9 $ 5,371.6
Derivatives(1)(2) used to manage
interest rate and currency risks
associated with U.S. Dollar
denominated debt (Note 17(b))
- Deferred hedging asset (40.4) --
- Deferred hedging liability
- Current 165.8 --
- Non-current 710.3 1,154.3
------------- -------------
835.7 1,154.3
- Interest payable 6.3 9.7
------------- -------------
Net June 2011 842.0 1,090.6 1,164.0 1,470.5
Derivatives(1)(2) used to manage
interest rate risk associated
with planned refinancing of
debt maturing June 1, 2007 June 2007 -- 6.5 -- --
---------------------------------------------------------------------------------------------------------------------------------
$ 5,770.1 $ 6,633.0 $ 5,808.9 $ 6,842.1
=================================================================================================================================
Derivatives(1)(2) used to manage
currency risks arising from U.S.
Dollar denominated purchases to
which hedge accounting is
- Applied June 2006 $ -- $ -- $ -- $ 0.1
- Not applied March 2006 $ -- $ -- $ -- $ 0.4
=================================================================================================================================
(1)Notional amount of all derivative financial instruments outstanding is
$5,138.6 (2005 -- $4,904.8).
(2) Designated as cash flow hedging items.
6 segmented information
The Company's reportable segments are Wireline and Wireless. The Wireline
segment includes voice local, voice long distance, data and other
telecommunications services excluding wireless. The Wireless segment includes
digital personal communications services, equipment sales and wireless
Internet services. Segmentation is based on similarities in technology, the
technical expertise required to deliver the products and services, the
distribution channels used and regulatory treatment. Intersegment sales are
recorded at the exchange value, which is the amount agreed to by the parties.
The following segmented information is regularly reported to the Company's
Chief Executive Officer (the Company's chief operating decision maker).
Years ended
December 31 Wireline Wireless Eliminations Consolidated
(millions) 2006 2005 2006 2005 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------------------------------
Operating revenues
External revenue $ 4,823.1 $ 4,847.2 $ 3,857.9 $ 3,295.5 $ -- $ -- $ 8,681.0 $ 8,142.7
Intersegment revenue 98.3 90.4 23.4 23.5 (121.7) (113.9) -- --
---------------------------------------------------------------------------------------------------------------------------------
4,921.4 4,937.6 3,881.3 3,319.0 (121.7) (113.9) 8,681.0 8,142.7
---------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Operations expense 3,020.5 3,031.4 2,124.1 1,876.0 (121.7) (113.9) 5,022.9 4,793.5
Restructuring and
work-force reduction
costs 61.6 53.9 6.2 -- -- -- 67.8 53.9
---------------------------------------------------------------------------------------------------------------------------------
3,082.1 3,085.3 2,130.3 1,876.0 (121.7) (113.9) 5,090.7 4,847.4
---------------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $ 1,839.3 $ 1,852.3 $ 1,751.0 $ 1,443.0 $ -- $ -- $ 3,590.3 $ 3,295.3
=================================================================================================================================
CAPEX(2) $ 1,191.0 $ 914.2 $ 427.4 $ 404.8 $ -- $ -- $ 1,618.4 $ 1,319.0
=================================================================================================================================
EBITDA less CAPEX $ 648.3 $ 938.1 $ 1,323.6 $ 1,038.2 $ -- $ -- $ 1,971.9 $ 1,976.3
=================================================================================================================================
EBITDA (from above) $ 3,590.3 $ 3,295.3
Depreciation 1,353.4 1,342.6
Amortization 222.2 281.1
---------------------------------------------------------
Operating income 2,014.7 1,671.6
Other expense, net 28.0 18.4
Financing costs 504.7 623.1
---------------------------------------------------------
Income before income taxes
and non-controlling interests 1,482.0 1,030.1
Income taxes 351.0 322.0
Non-controlling interests 8.5 7.8
--------------------------------------------------------
Net income $ 1,122.5 $ 700.3
========================================================
(1) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") is a
measure that does not have any standardized meaning prescribed by GAAP and is therefore
unlikely to be comparable to similar measures presented by other issuers; EBITDA is
defined by the Company as operating revenues less operations expense and restructuring
and workforce reduction costs. The Company has issued guidance on, and reports, EBITDA
because it is a key measure used by management to evaluate performance of its business
segments and is utilized in measuring compliance with certain debt covenants.
(2) Total capital expenditures ("CAPEX").
7 restructuring and workforce reduction costs
(a) Overview
Years ended December 31 (millions) 2006 2005
-------------------------------------------------------------------------------------------------------- ------------
Office closures General programs
General programs and initiated prior to
initiated in 2006 contracting out 2006 Total Total
--------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction costs
Workforce reduction
Voluntary $ 24.5 $ 3.5 $ -- $ 28.0 $ 26.1
Involuntary 32.7 4.5 (1.5) 35.7 25.1
Lease termination -- 0.1 -- 0.1 1.5
Other 3.5 0.5 -- 4.0 1.2
--------------------------------------------------------------------------------------------------------------------------------
60.7 8.6 (1.5) 67.8 53.9
---------------------------------------------------------------------------------------------------------------------------------
Disbursements
Workforce reduction
Voluntary(1) 11.1 15.2 -- 26.3 27.4
Involuntary and other 18.6 2.1 19.9 40.6 37.2
Lease termination -- 0.1 0.8 0.9 4.8
Other 3.5 0.5 -- 4.0 1.2
--------------------------------------------------------------------------------------------------------------------------------
33.2 17.9 20.7 71.8 70.6
--------------------------------------------------------------------------------------------------------------------------------
Expenses greater than (less than)
disbursements 27.5 (9.3) (22.2) (4.0) (16.7)
Other -- -- -- -- 3.1
--------------------------------------------------------------------------------------------------------------------------------
Change in restructuring and workforce
reduction accounts payable and accrued
liabilities 27.5 (9.3) (22.2) (4.0) (13.6)
Balance, beginning of period -- 25.5 31.6 57.1 70.7
--------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 27.5 $ 16.2 $ 9.4 $ 53.1 $ 57.1
================================================================================================================================
(1) Early Retirement Incentive Plan, Voluntary Departure Incentive Plan and other.
(b) Programs initiated prior to 2006
General: In 2005, the Company undertook a number of smaller initiatives, such
as operational consolidation, rationalization and integrations. These
initiatives aimed to improve the Company's operating and capital productivity.
As at December 31, 2006, no future expenses remain to be accrued or recorded
under the smaller initiatives, but variances from estimates currently recorded
may be recorded in subsequent periods.
Office closures and contracting out: In connection with the collective
agreement signed in the fourth quarter of 2005, an accompanying letter of
agreement set out the planned closure, on February 10, 2006, of a number of
offices in British Columbia. This initiative is a component of the Company's
competitive efficiency program and is aimed at improving the Company's
operating and capital productivity. The approximately 250 bargaining unit
employees affected by these office closures were offered the option of
redeployment or participation in a voluntary departure program (either the
Early Retirement Incentive Plan or the Voluntary Departure Incentive Plan).
As at December 31, 2006, no future expenses remain to be accrued or recorded
under the letter of agreement setting out the planned closure of a number of
offices in British Columbia, but variances from estimates currently recorded
may be recorded in subsequent periods. Other costs, such as other employee
departures and those associated with real estate, will be incurred and
recorded subsequent to December 31, 2006.
Similarly, an additional accompanying letter of agreement set out that the
Company intends to contract out specific non-core functions over the term of
the collective agreement. This initiative is a component of the Company's
competitive efficiency program and is aimed at allowing the Company to focus
its resources on those core functions that differentiate the Company for its
customers. The approximately 250 bargaining unit employees currently affected
by contracting out initiatives were offered the option of redeployment or
participation in the voluntary departure program (either the Early Retirement
Incentive Plan or the Voluntary Departure Incentive Plan.)
As at December 31, 2006, no future expenses remain to be accrued or recorded
under the letter agreement setting out the contracting out of specific
non-core functions, in respect of the approximately 250 bargaining unit
employees currently affected, but variances from estimates currently recorded
may be recorded in subsequent periods. Future costs will be incurred as the
initiative continues.
Integration of Wireline and Wireless operations: On November 24, 2005, the
Company announced the integration of its Wireline and Wireless operations, an
initiative that will continue into future years and that is a component of the
Company's competitive efficiency program.
(c) Programs initiated in 2006
General: In the first quarter of 2006, arising from its competitive efficiency
program, the Company undertook a number of smaller initiatives, such as
operational consolidation, rationalization and integration. These initiatives
are aimed to improve the Company's operating productivity and competitiveness.
For the year ended December 31, 2006, $37.9 million of restructuring and
workforce reduction costs were recorded in respect of these smaller
initiatives.
Also arising from its competitive efficiency program, the Company undertook
an initiative for a departmental reorganization and reconfiguration, resulting
in integration and consolidation. In the first quarter of 2006, approximately
600 bargaining unit employees were offered the option of redeployment or
participation in a voluntary departure program (either the Early Retirement
Incentive Plan or the Voluntary Departure Incentive Plan). As affected
employees were not required to select an option until after March 31, 2006, the
associated expenses were not eligible for recording prior to the second quarter
of 2006. In the second quarter of 2006, approximately 275 bargaining unit
employees accepted either the option of redeployment or participation in a
voluntary departure program. For the year ended December 31, 2006, $17.7
million of restructuring and workforce reduction costs were recorded in respect
of this initiative and were included with general programs initiated in 2006.
As at December 31, 2006, no future expenses remain to be accrued or recorded
under this initiative, but variances from estimates currently recorded may be
recorded in subsequent periods.
Continuing with its competitive efficiency program for integration of Wireline
and Wireless operations, for the year ended December 31, 2006, $12.2 million of
restructuring and workforce reduction costs were recorded in respect of this
initiative and were included with general programs initiated in 2006.
(d) 2007
The Company's estimate of restructuring and workforce reduction costs in 2007,
arising from its competitive efficiency program, which includes the continued
integration of Wireline and Wireless operations, does not currently exceed $50
million.
8 financing costs
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt $ 508.0 $ 635.5
Interest on short-term obligations and other 2.6 8.2
Foreign exchange(1) 6.4 4.6
Loss on redemption of long-term debt(2) -- 33.5
--------------------------------------------------------------------------------------------------------------------------------
517.0 681.8
Interest income
Interest on tax refunds (9.3) (25.2)
Other interest income 33.0) (33.5)
--------------------------------------------------------------------------------------------------------------------------------
(12.3) (58.7)
--------------------------------------------------------------------------------------------------------------------------------
$ 504.7 $ 623.1
=================================================================================================================================
(1) For the year ended December 31, 2006, these amounts include gains of NIL
(2005 -- $0.1) in respect of cash flow hedge ineffectiveness; no gains or
losses were experienced arising from fair value hedge ineffectiveness.
(2) This amount includes a loss of $2.3, which arose from the associated
settlement of financial instruments that were used to manage a portion of the
interest rate risk associated with Canadian dollar denominated debt that was
redeemed during the fourth quarter of 2005 (see Note 17(b)).
9 income taxes
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Current $ (58.2) $ (18.0)
Future 409.2 340.0
--------------------------------------------------------------------------------------------------------------------------------
$ 351.0 $ 322.0
=================================================================================================================================
The Company's income tax expense differs from that calculated by applying
statutory rates for the following reasons:
Years ended December 31 ($ in millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 497.3 33.6% $ 352.3 34.2%
Revaluation of future income tax liability
for change in statutory income tax rates (107.0) (5.1)
Tax rate differential on, and consequential
adjustments from, reassessment of prior year
tax issues (40.3) (13.9)
Share option award compensation 6.4 4.9
Change in estimates of available deductible
differences in prior years -- (37.5)
Other (5.4) 4.8
---------------------------------------------------------------------------------------------------------------------------------
351.0 23.7% 305.5 29.7%
Large corporations tax -- 16.5
---------------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements
of Income $ 351.0 23.7% $ 322.0 31.3%
=================================================================================================================================
As referred to in Note 1(b), the Company must make significant estimates in
respect of the composition of its future income tax asset and future income tax
liability. The operations of the Company are complex, and related tax
interpretations, regulations and legislation are continually changing. As a
result, there are usually some tax matters in question. Temporary differences
comprising the future income tax asset (liability) are estimated as follows:
As at December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Capital assets
Property, plant, equipment, other and intangible assets subject to amortization $ (56.9) $ (8.4)
Intangible assets with indefinite lives (866.1) (974.4)
Working capital, excluding reserves (506.1) 2.8
Pension amounts (192.9) (171.4)
Losses available to be carried forward 315.4 164.0
Reserves not currently deductible 97.7 111.3
Other 48.4 78.6
---------------------------------------------------------------------------------------------------------------------------------
$ (1,160.5) $ (797.5)
=================================================================================================================================
Presented on the Consolidated Balance Sheets as:
Future income tax asset
Current $ -- $ 226.4
Future income tax liability
Current (93.2) --
Non-current (1,067.3) (1,023.9)
---------------------------------------------------------------------------------------------------------------------------------
(1,160.5) (1,023.9)
---------------------------------------------------------------------------------------------------------------------------------
Net future income tax asset (liability) $ (1,160.5) $ (797.5)
=================================================================================================================================
The Company expects to be able to substantially utilize its non-capital
losses over the next year. The Company's assessment is that the probabilistic
risk of expiry of such non-capital losses is remote.
The Company has net capital losses and such losses may only be applied
against realized taxable capital gains. The Company has included a net capital
loss carry-forward of $799.7 million (2005 -- $645.0 million) in its Canadian
income tax returns, of which $188.0 million has been recognized in the
determination of its net future income tax liability as at December 31, 2006
(2005 -- NIL). Of the net capital losses carried-forward, as at December 31,
2006, $603.7 million have been denied on audit by the Canada Revenue Agency
and the Company is considering various courses of action with a view to
confirming all or a part of such net capital losses.
The Company conducts research and development activities, which are eligible
to earn Investment Tax Credits. During the year ended December 31, 2006, the
Company recorded Investment Tax Credits of $18.5 million (2005 -- $0.4
million), $18.1 million of which was recorded as a reduction of capital (2005
-- NIL) and the balance of which was recorded as a reduction of Operations
expense.
10 per share amounts
Basic income per Common Share and Non-Voting Share is calculated by dividing
Common Share and Non-Voting Share income by the total weighted average Common
Shares and Non-Voting Shares outstanding during the period. Diluted income per
Common Share and Non-Voting Share is calculated to give effect to share option
awards and, in the comparative period, warrants.
The following table presents the reconciliations of the denominators of the
basic and diluted per share computations. Net income equalled diluted Common
Share and Non-Voting Share income for all periods presented.
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Basic total weighted average Common Shares and Non-Voting Shares outstanding 343.8 357.1
Effect of dilutive securities
Exercise of share option awards 3.6 3.9
--------------------------------------------------------------------------------------------------------------------------------
Diluted total weighted average Common Shares and Non-Voting Shares outstanding 347.4 361.0
================================================================================================================================
For the year ended December 31, 2006, certain outstanding share option
awards, in the amount of 0.3 million (2005 -- 1.1 million), were not included
in the computation of diluted income per Common Share and Non-Voting Share
because the share option awards' exercise prices were greater than the average
market price of the Common Shares and Non-Voting Shares during the reported
periods.
11 share-based compensation
(a) Details of share-based compensation expense
Reflected in the Consolidated Statements of Income as "Operations expense" and
the Consolidated Statements of Cash Flows are the following share-based
compensation amounts:
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Associated Statement of Associated Statement of
Operations operating cash flows Operations operating cash flows
expense cash outflows adjustment expense cash outflows adjustment
--------------------------------------------------------------------------------------------------------------------------------
Share option awards $ 19.0 $ -- $ 19.0 $ 14.2 $ -- $ 14.2
Restricted stock units 26.5 (20.4) 6.1 18.5 (8.4) 10.1
Employee share purchase plan 32.2 (32.2) -- 35.7 (35.7) --
---------------------------------------------------------------------------------------------------------------------------------
$ 77.7 $ (52.6) $ 25.1 $ 68.4 $ (44.1) $ 24.3
=================================================================================================================================
For the year ended December 31, 2006, the associated operating cash flows in
respect of restricted stock units are net of hedging benefits of $18.6 million
(2005 -- NIL), as discussed further in (c) and Note 5. For the year ended
December 31, 2006, the income tax benefit arising from share-based compensation
was $19.7 million (2005 -- $18.5 million); as disclosed in Note 9, not all
share-based compensation amounts are deductible for income tax purposes.
(b) Share option awards
The Company applies the fair value based method of accounting for share-based
compensation awards granted to employees. Share option awards typically vest
over a three-year period (the requisite service period), but may vest over
periods of up to five years. The vesting method of share option awards, which
is determined at the date of grant, may be either cliff or graded; all share
option awards granted subsequent to 2004 have been cliff-vesting awards.
Some share option awards have a net-equity settlement feature. As discussed
further in Note 18(e), it is at the Company's option whether the exercise of a
share option is settled as a share option or using the net-equity settlement
feature. So as to align with the accounting treatment that is afforded to the
associated share options, the Company has selected the equity instrument fair
value method of accounting for the net-equity settlement feature.
The weighted average fair value of share option awards granted, and the
weighted average assumptions used in the fair value estimation at the time of
grant, using the Black-Scholes model (a closed-form option pricing model), are
as follows:
Years ended December 31 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Share option award fair value (per share option) $ 12.45 $ 12.08
Risk free interest rate 4.0% 3.8%
Expected lives(1) (years) 4.6 4.7
Expected volatility 35.7% 38.9%
Dividend yield 2.6% 2.3%
--------------------------------------------------------------------------------------------------------------------------------
(1) The maximum contractual term of the share option awards granted in 2006 and
2005 was seven years.
The risk free interest rate used in determining the fair value of the share
option awards is based on a Government of Canada yield curve that is current
at the time of grant. The expected lives of the share option awards are based
on historical share option award exercise data of the Company. Similarly,
expected volatility considers the historical volatility of the Company's
Non-Voting Shares. The dividend yield is the annualized dividend current at
the date of grant divided by the share option award exercise price. Dividends
are not paid on unexercised share option awards and are not subject to
vesting.
Had weighted average assumptions for grants of share options that are
reflected in the expense disclosures above been varied by 10% and 20% changes,
the compensation cost arising from share options for the year ended December
31, 2006, would have varied as follows:
Hypothetical change in
assumptions(1)
($ in millions) 10% 20%
--------------------------------------------------------------------------------------------------------------------------------
Risk free interest rate $ 0.3 $ 0.6
Expected lives (years) $ 0.7 $ 1.3
Expected volatility $ 1.5 $ 3.1
Dividend yield $ 0.4 $ 0.8
--------------------------------------------------------------------------------------------------------------------------------
(1) These sensitivities are hypothetical and should be used with caution.
Favourable hypothetical changes in the assumptions result in a decreased
amount, and unfavourable hypothetical changes in the assumptions result in
an increased amount, of the pro forma compensation cost arising from share
options. As the figures indicate, changes in fair value based on a 10%
variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not
be linear; in particular, variations in expected lives are constrained by
vesting periods and legal lives. Also, in this table, the effect of a
variation in a particular assumption on the amount of the pro forma
compensation cost arising from share options is calculated without changing
any other assumption; in reality, changes in one factor may result in
changes in another (for example, increases in risk free interest rates may
result in increased dividend yields), which might magnify or counteract the
sensitivities.
Subsequent to December 31, 2006, the Company amended substantially all of its
share option awards that were granted prior to January 1, 2005, and which were
outstanding on January 1, 2007, by adding a net-cash settlement feature; the
optionee has the choice of exercising the net-cash settlement feature. The
result of such amendment is that the affected outstanding share option awards
largely take on the characteristics of liability instruments rather than equity
instruments. For the outstanding share option awards that were amended and
which were granted subsequent to 2001, the minimum expense recognized for them
will be their grant-date fair values.
In conjunction with the amendment, the Company entered into a cash-settled
equity swap agreement that will substantially fix the Company's cost associated
with the affected outstanding share option awards.
The consolidated statement of income transitional effect (an expense increase)
of such amendment, reflecting vesting as at December 31, 2006, and which is
expected to be recorded in the first quarter of 2007, is as follows:
($ in millions except per share amounts) Wireline Wireless Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Change in:
Operations expense(1) $ 125.1 $ 27.8 $ 152.9
====================================================================================================
Income taxes(2) -- future 60.6
---------------------------------------------------------------------------------
Net income and Common Share and Non-Voting Share income $ 92.3
=================================================================================================================================
Income per Common Share and Non-Voting Share(1)(2)
=================================================================================================================================
2
-- Basic $ 0.27
-- Diluted $ 0.27
(1) This transitional amount does not result in an immediate cash outflow. The
timing of the associated cash outflows is predicated upon when optionees
exercise their share option awards and upon them choosing to use the net-cash
settlement feature.
This transitional amount excludes the effects of vesting, forfeitures,
cancellations and expiries that may occur subsequent to December 31, 2006.
Further, it excludes the effects of any hedging agreements substantially fixing
the cost of the share option awards to the Company as well as any changes in
the prices of the Company's Common Shares and Non-Voting Shares.
(2) Income taxes -- future, and per share amounts, are based upon the
corresponding amounts used for the year ended December 31, 2006, calculations.
Had such amendment occurred immediately prior to January 1, 2007, certain line
items of the Company's December 31, 2006, Consolidated Balance Sheet would
have been adjusted as follows to reflect the transitional effect:
As at December 31, 2006 ($ in millions) Impact of amending
As currently outstanding share
reported option awards(1) Pro forma
--------------------------------------------------------------------------------------------------------------------------------
Current liabilities
Accounts payable and accrued liabilities
Accrued share option award liability $ -- $ 180.6 $ 180.6
Future income taxes $ 93.2 $ (60.6) $ 32.6
Shareholders' equity
Options, warrants and other $ 0.8 $ (0.8) $ --
Retained earnings $ 1,080.1 $ (92.3) $ 987.8
Contributed surplus $ 163.5 $ (26.9) $ 136.6
--------------------------------------------------------------------------------------------------------------------------------
(1) This transitional amount excludes the effects of vesting, forfeitures,
cancellations and expiries that may occur subsequent to December 31, 2006.
Further, it excludes the effects of any hedging agreements substantially fixing
the cost of the share option awards to the Company as well as any changes in
the prices of the Company's Common Shares and Non-Voting Shares.
(c) Restricted stock units
The Company uses restricted stock units as a form of incentive compensation.
Each restricted stock unit is equal in value to one Non-Voting Share and the
dividends that would have arisen thereon had it been an issued and outstanding
Non-Voting Share; the notional dividends are recorded as additional issuances
of restricted stock units during the life of the restricted stock unit. The
restricted stock units become payable as they vest over their lives. Typically,
the restricted stock units vest over a period of 33 months. The vesting method,
which is determined at the date of grant, may be either cliff or graded.
The following table presents a summary of the activity related to the Company's
restricted stock units.
Years ended December 31, 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Number of restricted stock Weighted Number of restricted stock Weighted
units average units average
------------------------- grant date -------------------------- grant date
Non-vested Vested fair value Non-vested Vested fair value
--------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period
Non-vested 1,645,530 -- $ 32.16 880,053 -- $ 23.36
Vested -- 62,437 26.43 -- 118,434 18.47
Issued
Initial allocation 659,682 -- 44.70 1,076,966 -- 37.91
In lieu of dividends 48,293 -- 49.17 33,421 -- 43.30
Vested (706,599) 706,599 24.46 (158,877) 158,877 19.67
Settled in cash -- (731,785) 24.58 -- (214,874) 18.46
Forfeited and cancelled (128,293) -- 32.40 (186,033) -- 32.08
--------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period
Non-vested 1,518,613 -- 40.99 1,645,530 -- 32.16
Vested -- 37,251 $ 38.85 -- 62,437 $ 26.43
=================================================================================================================================
With respect to certain issuances of restricted stock units, the Company
entered into cash-settled equity forward agreements that fix the cost to the
Company; that information, as well as a schedule of the Company's non-vested
restricted stock units outstanding as at December 31, 2006, is set out in the
following table.
Number of Cost fixed to Number of Total number
fixed-cost the Company variable-cost of non-vested
restricted per restricted restricted restricted
stock units stock unit stock units stock units
--------------------------------------------------------------------------------------------------------------------------------
Vesting in years ending December 31:
2007 600,000 $ 40.91 66,720 666,720
2008 160,000 $ 50.91
440,000 $ 50.02
----------
600,000 251,893 851,893
---------------------------------------------------------------------------------------------------------------------------------
1,200,000 318,613 1,518,613
=================================================================================================================================
(d) Employee share purchase plan
The Company has an employee share purchase plan under which eligible employees
can purchase Common Shares through regular payroll deductions by contributing
between 1% and 10% of their pay. The Company contributes 45%, for the employee
population up to a certain job classification, for every dollar contributed by
an employee, to a maximum of 6% of employee pay; for more highly compensated
job classifications, the Company contributes 40%. Commencing July 25, 2005, and
concluding November 19, 2005, the Company increased its contribution to 100%
for all plan participants, other than the executive leadership team, up to 6%
of participants' eligible pay. There are no vesting requirements and the
Company records its contributions as a component of operating expenses.
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Employee contributions $ 75.9 $ 61.9
Company contributions 32.2 35.7
---------------------------------------------------------------------------------------------------------------------------------
$ 108.1 $ 97.6
=================================================================================================================================
Under this plan, the Company has the option of offering shares from Treasury
or having the trustee acquire shares in the stock market. Prior to February
2001 and subsequent to November 1, 2004, all Common Shares issued to employees
under the plan were purchased on the market at normal trading prices; in the
intervening period, shares were also issued from Treasury.
(e) Unrecognized, non-vested share-based compensation
As at December 31, 2006, compensation cost related to non-vested share-based
compensation that has not yet been recognized is set out in the following table
and is expected to be recognized over a weighted average period of 1.3 years
(2005 -- 2.3 years).
As at December 31 (millions)(1) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Share option awards $ 24.1 $ 27.1
Restricted stock units(2) 38.8 31.8
---------------------------------------------------------------------------------------------------------------------------------
$ 62.9 $ 58.9
=================================================================================================================================
(1) These disclosures are not likely to be representative of the effects on
reported net income for future periods for the following reasons: these amounts
reflect an estimate of forfeitures; these amounts do not reflect any provision
for future awards; these amounts do not reflect any provision for changes in
the intrinsic value of vested restricted stock units; these amounts do not
reflect any provision for the impacts of modification of share option awards
allowing for net-cash settlement; and for non-vested restricted stock units,
these amounts reflect intrinsic values as at the balance sheet dates.
(2) The compensation cost that has not yet been recognized in respect of
non-vested restricted stock units is calculated based upon the intrinsic value
of the non-vested restricted stock units as at the balance sheet dates, net of
the impacts of associated cash-settled equity forward agreements.
12 employee future benefits
The Company has a number of defined benefit and defined contribution plans
providing pension, other retirement and post-employment benefits to most of its
employees. Other benefit plans include a TELUS Quebec Inc. retiree healthcare
plan. The benefit plan(s) in which an employee is a participant reflects the
general development of the Company.
Pension Plan for Management and Professional Employees of TELUS Corporation:
This defined benefit pension plan, which ceased accepting new participants on
January 1, 2006, and which comprises approximately one-quarter of the Company's
total accrued benefit obligation, provides a non-contributory base level of
pension benefits. Additionally, on a contributory basis, employees can annually
choose increased and/or enhanced levels of pension benefits over the base level
of pension benefits. At an enhanced level of pension benefits, the defined
benefit pension plan has indexation of 100% of a specified cost-of-living
index, to an annual maximum of 2%. Pensionable remuneration is determined by
the annualized average of the best sixty consecutive months.
TELUS Corporation Pension Plan: Management and professional employees in
Alberta who joined the Company prior to January 1, 2001, and certain unionized
employees are covered by this contributory defined benefit pension plan, which
comprises slightly more than one-half of the Company's total accrued benefit
obligation. The plan contains a supplemental benefit account which may provide
indexation up to 70% of the annual change of a specified cost-of-living index
and pensionable remuneration is determined by the average of the best five
years in the last ten years preceding retirement.
TELUS Corporation Pension Plan for Employees of TELUS Communications (Quebec)
Inc. (formerly the TELUS Communications Quebec Pension Plan): This contributory
defined benefit pension plan, which comprises approximately one-tenth of the
Company's total accrued benefit obligation, has no indexation and pensionable
remuneration is determined by the average of the best four years.
TELUS Edmonton Pension Plan: This contributory defined benefit pension plan
ceased accepting new participants on January 1, 1998. Indexation is 60% of the
annual change of a specified cost-of-living index and pensionable remuneration
is determined by the annualized average of the best sixty consecutive months in
the last ten years preceding retirement.
Other defined benefit pension plans: In addition to the foregoing plans, the
Company has non-registered, non-contributory supplementary defined benefit
pension plans which have the effect of maintaining the earned pension benefit
once the allowable maximums in the registered plans are attained. As is common
with non-registered plans of this nature, these plans are funded only as
benefits are paid.
The Company has three contributory, non-indexed pension plans arising from a
pre-merger acquisition which comprise less than 1% of the Company's total
accrued benefit obligation; these plans ceased accepting new participants in
September 1989.
Other defined benefit plans: Other defined benefit plans, which are all
non-contributory, are comprised of a disability income plan, a healthcare plan
for retired employees and a life insurance plan. The healthcare plan for
retired employees and the life insurance plans ceased accepting new
participants effective January 1, 1997. In connection with the collective
agreement signed in 2005, an external supplier commenced providing a new
long-term disability plan effective January 1, 2006. The existing disability
income plan will continue to provide payments to previously approved claimants
and qualified eligible employees.
Telecommunication Workers Pension Plan: Certain employees in British Columbia
are covered by a union pension plan. Contributions are determined in accordance
with provisions of the negotiated labour contract and are generally based on
employee gross earnings.
British Columbia Public Service Pension Plan: Certain employees in British
Columbia are covered by a public service pension plan. Contributions are
determined in accordance with provisions of labour contracts negotiated by the
Province of British Columbia and are generally based on employee gross
earnings.
Defined contribution pension plans: During the latter half of 2006, the
Company revised its defined contribution pension plan offerings for 2007.
Effective January 1, 2007, the Company will now offer one defined contribution
pension plan, which will be contributory, and will be the only
Company-sponsored pension plan available to non-unionized and certain
unionized employees joining the Company after that date. Generally, employees
can annually choose to contribute to the plan at a rate of between 3% and 6%
of their pensionable earnings. The Company will match 100% of the
contributions of the employees up to 5% of their pensionable earnings and will
match 80% of employee contributions greater than that.
Contributions as a percentage of pensionable earnings 2007 2006
Minimum Maximum Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------
Employee contribution(1) 3.0% 6.0% 0% 6.0%
Employer contribution 3.0% 5.8% 3.0% 6.0%
--------------------------------------------------------------------------------------------------------------------------------
Total contribution(2) 6.0% 11.8% 3.0% 12.0%
================================================================================================================================
(1) Generally, membership in the defined contribution pension plan is
voluntary until an employee's third year service anniversary.
(2) In the event that annual contributions exceed allowable maximums, excess
amounts are contributed to a non-registered supplementary defined contribution
pension plan.
(a) Defined benefit plans
Information concerning the Company's defined benefit plans, in aggregate,
is as follows:
Pension Benefit Plans Other Benefit Plans
(millions) 2006 2005 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Accrued benefit obligation:
Balance at beginning of year $ 6,345.3 $ 5,366.7 $ 69.1 $ 61.1
Current service cost 132.4 105.6 3.5 3.4
Interest cost 315.9 319.3 3.7 8.2
Benefits paid (b) (273.9) (255.5) (5.5) (5.3)
Actuarial loss (gain) 59.9 809.2 0.9 1.7
---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (c)-(d) 6,579.6 6,345.3 71.7 69.1
---------------------------------------------------------------------------------------------------------------------------------
Plan assets (f):
Fair value at beginning of year 6,198.9 5,457.2 43.8 48.2
Annual return on plan assets 759.5 840.3 0.7 (0.3)
Employer contributions (g) 123.4 119.6 1.3 1.2
Employees' contributions 35.3 37.3 -- --
Benefits paid (b) (273.9) (255.5) (5.5) (5.3)
--------------------------------------------------------------------------------------------------------------------------------
Fair value at end of year 6,843.2 6,198.9 40.3 43.8
---------------------------------------------------------------------------------------------------------------------------------
Funded status -- plan surplus (deficit) 263.6 (146.4) (31.4) (25.3)
Unamortized net actuarial loss (gain) 812.5 1,109.0 (12.8) (17.1)
Unamortized past service costs 5.3 6.0 -- --
Unamortized transitional obligation (asset) (233.4) (278.1) 2.4 3.2
---------------------------------------------------------------------------------------------------------------------------------
Accrued benefit asset (liability) 848.0 690.5 (41.8) (39.2)
Valuation allowance (178.7) (152.5) -- --
---------------------------------------------------------------------------------------------------------------------------------
Accrued benefit asset (liability),
net of valuation allowance $ 669.3 $ 538.0 $ (41.8) $ (39.2)
=================================================================================================================================
In 2001, the Company sold substantially all of the TELUS Advertising
Services directory business and the TELUS Quebec directory business. As a
result of this transaction, the pension obligation relating to the former
TELUS Advertising Services employees, contained within the TELUS Corporation
Pension Plan and the TELUS Edmonton Pension Plan, will be transferred upon
receipt of the requisite regulatory approvals; such approvals have not been
received as at December 31, 2006. The TELUS Corporation Pension Plan pension
obligation of $17.2 million and the TELUS Edmonton Pension Plan pension
obligation of $3.8 million and the TELUS Edmonton Pension Plan obligation of
$3.8 million have been actuarially determined as at July 31, 2001. In
accordance with the sale agreement, TELUS Corporation Pension Plan assets of
$17.2 million, plus interest accrued to December 31, 2006, of $7.6 million
(2005 -- $6.0 million) will be transferred along with the pension obligation;
the corresponding amounts in respect of the TELUS Edmonton Pension Plan are
$3.8 million, plus accrued interest of $1.7 million (2005 -- $1.3 million).
Interest will continue to accrue, at 7% per annum, up to the date that the
assets are transferred. The transfer will be accounted for as a settlement in
the period in which the transfer occurs.
The accrued benefit asset (liability), net of valuation allowance, is
reflected in the Consolidated Balance Sheets as follows:
As at December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Pension benefit plans $ 669.3 $ 538.0
Other benefit plans (41.8) (39.2)
--------------------------------------------------------------------------------------------------------------------------------
$ 627.5 $ 498.8
=================================================================================================================================
Presented on the Consolidated Balance Sheets as:
Deferred charges (Note 20(b)) $ 826.2 $ 687.9
Other long-term liabilities (Note 20(b)) (198.7) (189.1)
--------------------------------------------------------------------------------------------------------------------------------
$ 627.5 $ 498.8
=================================================================================================================================
The measurement date used to determine the plan assets and accrued benefit
obligation was December 31.
(b) Defined benefit plans -- cost (recovery)
The Company's net defined benefit plan costs (recoveries) were as follows:
Years ended December 31 (millions) 2006 2005
----------------------------------------------------------------------------------- -----------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
--------------------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Current service cost
(employer portion) $ 97.1 $ -- $ 97.1 $ 68.3 $ -- $ 68.3
Interest cost 315.9 -- 315.9 319.3 -- 319.3
Return on plan assets (759.5) 314.4 (445.1) (840.3) 448.0 (392.3)
Past service costs -- 0.7 0.7 -- 0.6 0.6
Actuarial loss (gain) 59.9 (17.9) 42.0 809.2 (789.1) 20.1
Valuation allowance provided
against accrued benefit asset -- 26.2 26.2 -- 25.5 25.5
Amortization of transitional asset -- (44.7) (44.7) -- (44.7) (44.7)
--------------------------------------------------------------------------------------------------------------------------------
$(286.6) $ 278.7 $ (7.9) $ 356.5 $ (359.7) $ (3.2)
=================================================================================================================================
(1)Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
Years ended December 31 (millions) 2006 2005
----------------------------------------------------------------------------------- -----------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
---------------------------------------------------------------------------------------------------------------------------------
Other benefit plans
Current service cost
(employer portion) $ 3.5 $ -- $ 3.5 $ 3.4 $ -- $ 3.4
Interest cost 3.7 -- 3.7 8.2 -- 8.2
Return on plan assets (0.7) (1.8) (2.5) 0.3 (2.8) (2.5)
Actuarial loss (gain) 0.9 (2.5) (1.6) 1.7 (3.7) (2.0)
Amortization of transitional
obligation -- 0.8 0.8 -- 0.8 0.8
---------------------------------------------------------------------------------------------------------------------------------
$ 7.4 $ (3.5) $ 3.9 $ 13.6 $ (5.7) $ 7.9
=================================================================================================================================
(1)Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
(c) Benefit payments
Estimated future benefit payments from the Company's defined benefit plans are
as follows:
Years ending December 31 (millions) Pension Other Benefit
Benefit Plans Plans
---------------------------------------------------------------------------------------------------------------------------------
2007 $ 280.0 $ 5.6
2008 292.2 5.8
2009 307.2 6.1
2010 322.5 6.2
2011 340.6 6.3
2012-2016 1,947.8 32.3
---------------------------------------------------------------------------------------------------------------------------------
(d) Disaggregation of defined benefit pension plan funding status
Accrued benefit obligations are the actuarial present values of benefits
attributed to employee services rendered to a particular date. The Company's
disaggregation of defined benefit pension plans surplus and deficits at
year-end are as follows:
As at December 31 (millions) 2006 2005
---------------------------------------------------------------------------------- ------------------------------------------
Accrued Funded status - Accrued Funded status -
benefit plan surplus benefit plan surplus
obligation Plan assets (deficit) obligation Plan assets (deficit)
---------------------------------------------------------------------------------------------------------------------------------
Pension plans that have plan assets
in excess of accrued benefit
obligations $ 4,130.3 $ 4,602.9 $ 472.6 $ 3,562.7 $ 3,805.0 $ 242.3
Pension plans that have accrued
benefit obligations in excess
of plan assets
Funded 2,270.0 2,240.3 (29.7) 2,611.4 2,393.9 (217.5)
Unfunded 179.3 -- (179.3) 171.2 -- (171.2)
---------------------------------------------------------------------------------------------------------------------------------
2,449.3 2,240.3 (209.0) 2,782.6 2,393.9 (388.7)
---------------------------------------------------------------------------------------------------------------------------------
(see (a)) $ 6,579.6 $ 6,843.2 $ 263.6 $ 6,345.3 $ 6,198.9 $ (146.4)
=================================================================================================================================
As at December 31, 2006 and 2005, undrawn Letters of Credit, further discussed
in Note 17(c), secured certain of the unfunded defined benefit pension plans.
(e) Disaggregation of other defined benefit plan funding status
Accrued benefit obligations are the actuarial present values of benefits
attributed to employee services rendered to a particular date. The Company's
disaggregation of other defined benefit plans surplus and deficits at year-end
are as follows:
As at December 31 (millions) 2006 2005
---------------------------------------------------------------------------------- ------------------------------------------
Accrued Funded status - Accrued Funded status -
benefit plan surplus benefit plan surplus
obligation Plan assets (deficit) obligation Plan assets (deficit)
---------------------------------------------------------------------------------------------------------------------------------
Other benefit plans that have
plan assets in excess of accrued
benefit obligations $ 31.0 $ 40.3 $ 9.3 $ 35.0 $ 43.8 $ 8.8
Unfunded other benefit plans
that have accrued benefit
obligations in excess of plan
assets 40.7 -- (40.7) 34.1 -- (34.1)
---------------------------------------------------------------------------------------------------------------------------------
(see (a)) $ 71.7 $ 40.3 $ (31.4) $ 69.1 $ 43.8 $ (25.3)
=================================================================================================================================
(f) Accumulated pension benefit obligations
Accumulated benefit obligations differ from accrued benefit obligations in
that accumulated benefit obligations do not include assumptions about future
compensation levels. The Company's disaggregation of defined pension benefit
plans accumulated benefit obligations and plan assets at year-end are as
follows:
As at December 31 (millions) 2006 2005
---------------------------------------------------------------------------------- -------------------------------------------
Accumulated Accumulated
benefit benefit
obligation Plan assets Difference obligation Plan assets Difference
---------------------------------------------------------------------------------------------------------------------------------
Pension plans that have plan
assets in excess of accumulated
benefit obligations $ 5,994.3 $ 6,825.7 $ 831.4 $ 4,188.5 $ 4,695.5 $ 507.0
Pension plans that have
accumulated benefit obligations
in excess of plan assets
Funded 18.1 17.5 (0.6) 1,561.3 1,503.4 (57.9)
Unfunded 166.0 -- (166.0) 160.1 -- (160.1)
---------------------------------------------------------------------------------------------------------------------------------
184.1 17.5 (166.6) 1,721.4 1,503.4 (218.0)
---------------------------------------------------------------------------------------------------------------------------------
$ 6,178.4 $ 6,843.2 $ 664.8 $ 5,909.9 $ 6,198.9 $ 289.0
=================================================================================================================================
(g) Plan investment strategies and policies
The Company's primary goal for the defined benefit plans is to ensure the
security of the retirement income and other benefits of the plan members and
their beneficiaries. A secondary goal of the Company is to maximize the
long-term rate of return of the defined benefit plans' assets within a level
of risk acceptable to the Company.
Risk management: The Company considers absolute risk (the risk of
contribution increases, inadequate plan surplus and unfunded obligations) to
be more important than relative return risk. Accordingly, the defined benefit
plans' designs, the nature and maturity of defined benefit obligations and
characteristics of the plans' memberships significantly influence investment
strategies and policies. The Company manages risk through specifying allowable
and prohibited investment types, setting diversification strategies and
determining target asset allocations.
Allowable and prohibited investment types: Allowable and prohibited
investment types, along with associated guidelines and limits, are set out in
each fund's Pension Benefits Standards Act required Statement of Investment
Policies and Procedures ("SIP&P"), which is reviewed and approved annually by
the designated governing fiduciary. The SIP&P guidelines and limits are
further governed by the Pension Benefits Standards Regulations' permitted
investments and lending limits. As well as conventional investments, each
fund's SIP&P may provide for the use of derivative products to facilitate
investment operations and to manage risk provided that no short position is
taken, no use of leverage is made and there is no violation of guidelines and
limits established in the SIP&P. Internally managed funds are prohibited from
increasing grandfathered investments in securities of the Company;
grandfathered investments were made prior to the merger of BC TELECOM Inc. and
TELUS Corporation, the Company's predecessors. Externally managed funds are
permitted to invest in securities of the Company, provided that the
investments are consistent with the funds' mandate and are in compliance with
the relevant SIP&P.
Diversification: The Company's strategy for equity security investments is
to be broadly diversified across individual securities, industry sectors and
geographical regions. A meaningful portion (15-25% of total plans' assets) of
the investment in equity securities is allocated to foreign equity securities
with the intent of further increasing the diversification of the plans'
assets. Debt securities may include a meaningful allocation to mortgages with
the objective of enhancing cash flow and providing greater scope for the
management of the bond component of the plans' assets. Debt securities also
may include real return bonds to provide inflation protection, consistent with
the indexed nature of some defined benefit obligations. Real estate
investments are used to provide diversification of plans' assets, potential
long-term inflation hedging and comparatively stable investment income.
Relationship between plan assets and benefit obligations: With the objective
of lowering its long-term costs of defined benefit plans, the Company
purposely mismatches plan assets and benefit obligations. This mismatching is
implemented by including equity investments in the long-term asset mix as well
as fixed income securities and mortgages with durations that differ from the
benefit obligations. Compensation for liquidity issues that may have otherwise
arisen from mismatching of plan assets and benefit obligations comes from
broadly diversified investment holdings (including cash and short-term
investment holdings) and cash flows from dividends, interest and rents from
diversified investment holdings.
Asset allocations: Information concerning the Company's defined benefit
plans' target asset allocation and actual asset allocation is as follows:
Pension Benefit Plans Other Benefit Plans
--------------------------------------------------------------------------------------------------------------------------------
Target Percentage of plan Target Percentage of plan
allocation assets at end of year allocation assets at end of year
2007 2006 2005 2007 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Equity securities 58-64% 61% 62% -- -- --
Debt securities 32-38% 33% 34% -- -- --
Real estate 4-6% 5% 4% -- -- --
Other 0-2% 1% -- 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------------
100% 100% 100% 100%
=================================================================================================================================
At December 31, 2006, shares of TELUS Corporation accounted for less than 1%
of the assets held in the pension and other benefit trusts administered by the
Company.
(h) Employer contributions
The best estimates of fiscal 2007 employer contributions to the Company's
defined benefit plans are approximately $111 million and approximately $1
million for defined benefit pension plans and other defined benefit plans,
respectively. These estimates are based upon the mid-year 2006 annual funding
reports that were prepared by actuaries using December 31, 2005, actuarial
valuations. The funding reports are based on the pension plans' fiscal years,
which are calendar years. The next annual funding valuations are expected to
be prepared mid-year 2007.
(i) Assumptions
Management is required to make significant estimates about certain actuarial
and economic assumptions to be used in determining defined benefit pension
costs, accrued benefit obligations and pension plan assets. These significant
estimates are of a long-term nature, which is consistent with the nature of
employee future benefits. The significant weighted average actuarial
assumptions arising from these estimates and adopted in measuring the
Company's accrued benefit obligations are as follows:
Pension Benefit Plans Other Benefit Plans
2006 2005 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Discount rate used to determine:
Net benefit costs for the year ended December 31 5.00% 6.00% 5.00% 5.34%
Accrued benefit obligation as at December 31 5.00% 5.00% 4.84% 4.83%
Expected long-term rate of return(1) on plan assets
used to determine:
Net benefit costs for the year ended December 31 7.25% 7.25% 5.50% 5.50%
Accrued benefit obligation as at December 31 7.25% 7.25% 5.50% 5.50%
Rate of future increases in compensation used
to determine:
Net benefit costs for the year ended December 31 3.00% 3.00% -- --
Accrued benefit obligation as at December 31 3.00% 3.00% -- --
--------------------------------------------------------------------------------------------------------------------------------
(1)The expected long-term rate of return is based upon forecasted returns of
the major asset categories and weighted by the plans' target asset allocations
(see (g)). Forecasted returns arise from the Company's ongoing review of
trends, economic conditions, data provided by actuaries and updating of
underlying historical information.
2006 sensitivity of key assumptions Pension Benefit Plans Other Benefit Plans
--------------------------------------------------------------------------------------------------------------------------------
Change in Change in Change in Change in
(millions) obligation expense obligation expense
--------------------------------------------------------------------------------------------------------------------------------
Impact of hypothetical 0.25% change(1) in:
Discount rate $ 229.8 $ 22.2 $ 1.1 $ --
Expected long-term rate of return on plan assets $ 15.3 $ 0.1
Rate of future increases in compensation $ 30.5 $ 6.2 $ -- $ --
---------------------------------------------------------------------------------------------------------------------------------
(1)These sensitivities are hypothetical and should be used with caution.
Favourable hypothetical changes in the assumptions result in decreased
amounts, and unfavourable hypothetical changes in the assumptions result in
increased amounts, of the obligations and expenses. Changes in amounts based
on a 0.25% variation in assumptions generally cannot be extrapolated because
the relationship of the change in assumption to the change in amounts may not
be linear. Also, in this table, the effect of a variation in a particular
assumption on the change in obligation or change in expense is calculated
without changing any other assumption; in reality, changes in one factor may
result in changes in another (for example, increases in discount rates may
result in increased expectations about the long-term rate of return on plan
assets), which might magnify or counteract the sensitivities.
The Company's health benefit costs for the defined benefit plan for retired
employees were estimated to increase at an annual rate of 10% (2005 -- 9.0%),
decreasing to an annual growth rate of 5% (2005 -- 5%) over an ten-year period
(2005 -- eight-year period).
(j) Defined contribution plans
The Company's total defined contribution pension plan costs recognized were as
follows:
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Union pension plan and public service pension plan contributions $ 30.7 $ 26.3
Other defined contribution pension plans 18.2 15.1
---------------------------------------------------------------------------------------------------------------------------------
$ 48.9 $ 41.4
=================================================================================================================================
13 accounts receivable
On July 26, 2002, TELUS Communications Inc., a wholly-owned subsidiary of
TELUS, entered into an agreement, which was amended September 30, 2002, March
1, 2006, and November 30, 2006, with an arm's-length securitization trust
under which TELUS Communications Inc. is able to sell an interest in certain
of its trade receivables up to a maximum of $650 million. As a result of
selling the interest in certain of the trade receivables on a fully-serviced
basis, a servicing liability is recognized on the date of sale and is, in
turn, amortized to earnings over the expected life of the trade receivables.
This "revolving-period" securitization agreement had an initial term ending
July 18, 2007; the November 30, 2006, amendment resulted in the term being
extended to July 18, 2008. TELUS Communications Inc. is required to maintain
at least a BBB (low) credit rating by Dominion Bond Rating Service or the
securitization trust may require the sale program to be wound down prior to
the end of the initial term; at December 31, 2006, the rating was A (low).
As at December 31 ($ in millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 1,216.1 $ 1,129.3
Securitized receivables (567.3) (599.2)
Retained interest in receivables sold 58.4 80.2
---------------------------------------------------------------------------------------------------------------------------------
Receivables held $ 707.2 $ 610.3
=================================================================================================================================
For the year ended December 31, 2006, the Company recognized losses of $5.1
million (2005 -- $3.9 million) on the sale of receivables arising from the
securitization.
Cash flows from the securitization are as follows:
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, beginning of period $ 500.0 $ 150.0
Proceeds from new securitizations 410.0 350.0
Securitization reduction payments (410.0) --
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, end of period $ 500.0 $ 500.0
=================================================================================================================================
Proceeds from collections reinvested in revolving-period securitizations $ 3,863.0 $ 1,679.3
=================================================================================================================================
Proceeds from collections pertaining to retained interest $ 499.3 $ 275.3
=================================================================================================================================
The key economic assumptions used to determine the loss on sale of
receivables, the future cash flows and fair values attributed to the retained
interest, as further discussed in Note 1(m), are as follows:
Years ended December 31 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Expected credit losses as a percentage of accounts receivable sold 1.2% 1.2%
Weighted average life of the receivables sold (days) 39 39
Effective annual discount rate 4.7% 3.6%
Servicing 1.0% 1.0%
--------------------------------------------------------------------------------------------------------------------------------
Generally, the sold trade receivables do not experience prepayments.
At December 31, 2006, key economic assumptions and the sensitivity of the
current fair value of residual cash flows to immediate 10% and 20% changes in
those assumptions are as follows:
Hypothetical change in
assumptions(1)
($ in millions) 2006 10% 20%
--------------------------------------------------------------------------------------------------------------------------------
Carrying amount/fair value of future cash flows $ 58.4
Expected credit losses as a percentage of accounts
receivable sold $ 0.6 $ 1.2
Weighted average life of the receivables sold (days) $ -- $ 0.1
Effective annual discount rate $ -- $ 0.1
---------------------------------------------------------------------------------------------------------------------------------
(1)These sensitivities are hypothetical and should be used with caution.
Favourable hypothetical changes in the assumptions result in an increased
value, and unfavourable hypothetical changes in the assumptions result in a
decreased value, of the retained interest in receivables sold. As the figures
indicate, changes in fair value based on a 10% variation in assumptions
generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, in this table,
the effect of a variation in a particular assumption on the fair value of the
retained interest is calculated without changing any other assumption; in
reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in increased credit losses),
which might magnify or counteract the sensitivities.
14 capital assets
(a) Capital assets, net
As at December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Accumulated Accumulated
depreciation depreciation
and Net book and Net book
Cost amortization value Cost amortization value
--------------------------------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunications assets $ 18,061.8 $ 12,755.3 $ 5,306.5 $ 17,380.4 $ 12,002.2 $ 5,378.2
Assets leased to customers 693.3 550.9 142.4 732.9 556.8 176.1
Buildings and leasehold improvements 1,852.5 1,002.7 849.8 1,754.8 916.8 838.0
Office equipment and furniture 1,110.6 840.8 269.8 980.7 717.6 263.1
Assets under capital lease 18.5 9.4 9.1 18.5 6.1 12.4
Other 340.6 259.6 81.0 329.3 244.4 84.9
Land 48.9 -- 48.9 46.7 -- 46.7
Assets under construction 725.4 -- 725.4 516.4 -- 516.4
Materials and supplies 33.6 -- 33.6 23.6 -- 23.6
---------------------------------------------------------------------------------------------------------------------------------
22,885.2 15,418.7 7,466.5 21,783.3 14,443.9 7,339.4
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 362.9 138.3 224.6 362.9 116.2 246.7
Software 1,306.0 1,043.4 262.6 1,207.1 884.4 322.7
Access to rights-of-way and other 122.3 60.3 62.0 119.3 51.2 68.1
---------------------------------------------------------------------------------------------------------------------------------
1,791.2 1,242.0 549.2 1,689.3 1,051.8 637.5
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 3,984.9 1,018.5 2,966.4 3,983.1 1,018.5 2,964.6
---------------------------------------------------------------------------------------------------------------------------------
$ 28,661.3 $ 17,679.2 $ 10,982.1 $ 27,455.7 $ 16,514.2 $ 10,941.5
=================================================================================================================================
(1) Accumulated amortization of spectrum licences is amortization recorded prior
to 2002 and the transitional impairment amount.
The following table presents items included in capital expenditures.
Years ended December 31 (millions) 2006 2005
---------------------------------------------------------------------------------------------------------------------------------
Additions of intangible assets
-- Subject to amortization $ 139.1 $ 191.8
-- With indefinite lives 1.8 8.8
---------------------------------------------------------------------------------------------------------------------------------
$ 140.9 $ 200.6
=================================================================================================================================
The following table presents items included in capital expenditures.
Years ended December 31 (millions) 2006 2005
---------------------------------------------------------------------------------------------------------------------------------
Capitalized internal labour costs $ 306.8 $ 213.0
=================================================================================================================================
(b) Intangible assets subject to amortization
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at December 31, 2006, for
each of the next five fiscal years is as follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2007 $ 178.0
2008 89.7
2009 33.3
2010 12.9
2011 10.8
---------------------------------------------------------------------------------------------------------------------------------
(c) Intangible assets with indefinite lives
As referred to in Note 1(b) and Note 1(f), the carrying value of intangible
assets with indefinite lives and goodwill are periodically tested for
impairment and this test represents a significant estimate for the Company.
There is a material degree of uncertainty with respect to this estimate given
the necessity of making key economic assumptions about the future. The Company
considers a range of reasonably possible amounts and decides upon an amount
that represents management's best estimate. If the future was to adversely
differ from management's best estimate of key economic assumptions and
associated cash flows were to be materially adversely affected, the Company
could potentially experience future material impairment charges in respect of
its intangible assets with indefinite lives and goodwill.
Consistent with current industry-specific valuation methods, a combination of
the discounted cash flow approach, the market-comparable approach and
analytical review of industry and Company-specific facts is used in
determining the fair value of its spectrum licences and goodwill. The
discounted cash flow methodology uses management's best estimate of the cash
flows and a discount rate established by calculating a weighted average cost
of capital for each reporting unit. The market comparable approach uses
current (at the time of test) market consensus estimates and equity trading
prices for U.S. and Canadian firms in the same industry. In addition, the
Company ensures that the combination of the valuations of the reporting units
is reasonable based on current market values of the Company.
Sensitivity testing was conducted as a part of the December 2006 annual test.
A component of the sensitivity testing was a break-even analysis. An
assumption of no growth rate, with all other assumptions being held constant,
resulted in the Company continuing to be able to recover the carrying value of
its intangible assets with indefinite lives and goodwill for the foreseeable
future. Stress testing included moderate declines in annual cash flows with
all other assumptions being held constant; this too resulted in the Company
continuing to be able to recover the carrying value of its intangible assets
with indefinite lives and goodwill for the foreseeable future.
15 goodwill
Years ended December 31 (millions) 2006 2005
---------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 3,156.9 $ 3,126.8
Goodwill arising from current period acquisitions 40.4 24.5
Foreign exchange on goodwill of self-sustaining foreign operations 0.7 (2.3)
Goodwill arising from contingent consideration paid in respect of a prior year's acquisition -- 7.9
Other (28.5) --
---------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $3,169.5 $3,156.9
=================================================================================================================================
FSC Internet Corp.: Of the 2006 goodwill addition, $17.5 million, none of
which is expected to be deductible for tax purposes, arose from the April 7,
2006, cash acquisition of FSC Internet Corp., operating as Assurent Secure
Technologies, a provider of information technology security services and
products. The investment was made with a view to the ongoing advancement of
the Company's existing suite of security solutions.
The primary factor that contributed to a purchase price that resulted in the
recognition of goodwill is the low degree of net tangible assets relative to
the earnings capacity of the acquired business. Effective the acquisition
date, the acquired company's results are included in the Company's
Consolidated Statements of Income and are included in the Company's Wireline
segment.
Ambergris Solutions Inc.: The goodwill addition in the year ended December
31, 2005, none of which is expected to be deductible for tax purposes, arose
from the cash acquisition of an effective 52.5% economic interest in Ambergris
Solutions Inc., a business process outsourcing company. The acquisition was
effected in two steps: one on February 15, 2005, for an effective 49% economic
interest and one on May 13, 2005, for an effective 3.5% economic interest. The
initial effective 49% economic interest resulted in the Company controlling
Ambergris Solutions Inc. as the Company controlled, but did not wholly-own, an
intermediate holding company which, in turn, controlled, but did not
wholly-own, Ambergris Solutions Inc. This investment was made with a view to
enhancing the Company's competitiveness in contact centre offerings.
In the second half of 2006, the Company increased its total effective
economic interest in the entity from 52.5% to 97.4%, resulting in a 2006
goodwill addition of $22.9 million, none of which is expected to be deductible
for tax purposes.
The primary factor that contributed to a purchase price that resulted in the
recognition of goodwill is the low degree of net tangible assets in the
industry relative to the market value of established Asian operations.
Ambergris Solutions Inc.'s results have been included in the Company's
Consolidated Statements of Income and the Company's Wireline segment since the
acquisition of control on February 15, 2005.
Other: During 2006, the Company updated its estimate of the net income tax
benefits that were obtained in the course of pre-2005 business combinations.
This has resulted in a decrease in the future income tax liability of $26.5
million, which has been recorded as a reduction of the unamortized balance of
goodwill arising from the acquisitions.
16 short-term obligations
At December 31, 2006, the Company's available bilateral bank facilities
totalled $74 million (2005 -- $74 million), $1.2 million (2005 -- NIL) of
which was utilized in the form of an overdraft; $2.6 million (2005 -- $7.3
million) was utilized as outstanding undrawn letters of credit.
17 long-term debt
(a) Details of long-term debt
As at December 31 ($ in millions)
Series Rate of interest Maturity 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Notes
U.S. (2) 7.50%(1) June 2007 $ 1,358.8 $ 1,354.4
U.S. (3) 8.00%(1) June 2011 2,236.7 2,230.6
CB 5.00%(1) June 2013 299.7 --
---------------------------------------------------------------------------------------------------------------------------------
3,895.2 3,585.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Credit Facilities 5.31% May 2008 120.0 142.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Debentures
1 12.00%(1) May 2010 50.0 50.0
2 11.90%(1) November 2015 125.0 125.0
3 10.65%(1) June 2021 175.0 175.0
5 9.65%(1) April 2022 249.0 249.0
B 8.80%(1) September 2025 200.0 200.0
---------------------------------------------------------------------------------------------------------------------------------
799.0 799.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. First Mortgage Bonds
U 11.50%(1) July 2010 30.0 30.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Medium Term Notes
1 7.10%(1) February 2007 70.0 70.0
---------------------------------------------------------------------------------------------------------------------------------
Capital leases issued at varying rates of interest from 4.1% to 16.69% and
maturing on various dates up to 2013 9.2 12.5
---------------------------------------------------------------------------------------------------------------------------------
Other 4.7 6.4
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 4,928.1 6,336.5 4,644.9
Less -- current maturities 1,434.4 5.0
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt -- non-current $ 3,493.7 $ 4,639.9
=================================================================================================================================
(1) Interest is payable semi-annually.
(2) Principal face value of notes is U.S.$1,166.5 million (2005 -- U.S.$1,166.5 million).
(3) Principal face value of notes is U.S.$1,925.0 million (2005 -- U.S.$1,925.0 million).
(b) TELUS Corporation notes
The notes are senior, unsecured and unsubordinated obligations of the Company
and rank equally in right of payment with all existing and future unsecured,
unsubordinated obligations of the Company, are senior in right of payment to
all existing and future subordinated indebtedness of the Company, and are
effectively subordinated to all existing and future obligations of, or
guaranteed by, the Company's subsidiaries.
The indentures governing the notes contain certain covenants which, among
other things, place limitations on the ability of TELUS and certain of its
subsidiaries to: grant security in respect of indebtedness, enter into sale
and lease-back transactions and incur new indebtedness.
2007 and 2011 (U.S. Dollar) Notes: In May 2001, the Company publicly issued
U.S.$1.3 billion 2007 Notes at a price of U.S.$995.06 per U.S.$1,000.00 of
principal and U.S.$2.0 billion 2011 Notes at a price of U.S.$994.78 per
U.S.$1,000.00 of principal. The notes are redeemable at the option of the
Company, in whole at any time, or in part from time to time, on not fewer than
30 nor more than 60 days' prior notice, at a redemption price equal to the
greater of (i) the present value of the notes discounted at the Adjusted
Treasury Rate plus 25 basis points in the case of the 2007 Notes and 30 basis
points in the case of the 2011 Notes, or (ii) 100% of the principal amount
thereof. In addition, accrued and unpaid interest, if any, will be paid to the
date fixed for redemption.
2007 and 2011 Cross Currency Interest Rate Swap Agreements: With respect to
the 2007 and 2011 (U.S. Dollar) Notes, U.S.$3.1 billion (2005 -- U.S.$3.1
billion) in aggregate, the Company entered into cross currency interest rate
swap agreements which effectively convert the principal repayments and
interest obligations to Canadian dollar obligations with effective fixed
interest rates and fixed economic exchange rates.
The cross currency interest rate swap agreements contain an optional early
termination provision which states that either party could elect to terminate
these swap agreements on May 30, 2006, if (i) the highest of the long-term
unsecured unsubordinated debt ratings of the Company falls below BBB as
determined by Standard & Poor's Rating Services or Baa2 as determined by
Moody's Investors Service or (ii) in the case of these two ratings having a
difference of two or more rating increments, the lower of the two ratings is
below BBB- or Baa3 or (iii) the ratings for the Company's counterparties fall
below A or A2.
In contemplation of the planned refinancing of the 2007 (U.S. Dollar) Notes,
in May 2006 the Company replaced approximately 63% of the notional value of
the existing cross currency interest rate swap agreements with a like amount
of new cross currency interest rate swap agreements which have a lower
effective fixed interest rate and a lower effective fixed exchange rate. This
replacement happened concurrent with the issuance of the 2013 (Canadian
Dollar) Notes (see below); the two transactions had the composite effect of
deferring, from June 2007 to June 2013, the payment of $300 million,
representing a portion of the amount that would have been due either under the
cross currency interest rate swap agreements or to the 2007 (U.S. Dollar) Note
holders (to whom the amounts would ultimately have been paid would depend upon
changes in interest and foreign exchange rates over the period to maturity of
the underlying debt).
To terminate the previous cross currency interest rate swap agreements, the
Company made a payment of $354.6 million, including $14.0 million in respect
of hedging of then-current period interest payments, to the counterparties.
The remaining $340.6 million portion of the payment made to the counterparties
of the previous cross currency interest rate swap agreements exceeded the
associated amount of the deferred hedging liability, such excess being $25.8
million and which will be deferred and amortized over the remainder of the
life of the 2007 (U.S. Dollar) Notes.
The following table sets out the composition of the payments made to the
counterparties to the cross currency interest rate swap agreements and the
related accounting amounts.
At date of early termination of cross Amounts to be
currency interest rate swap agreements deferred and
-------------------------------------- amortized over
Hedging remainder of life of
Amounts paid amounts 2007 (U.S. Dollar)
(millions) in advance(1) recorded Notes(2)
--------------------------------------------------------------------------------------------------------------------------------
In respect of principal $ 309.4 $ 314.8 $ (5.4)
In respect of interest that would have been incurred
subsequent to termination date and prior to maturity
of 2007 (U.S. Dollar) Notes 31.2 -- 31.2
--------------------------------------------------------------------------------------------------------------------------------
340.6 314.8 25.8
In respect of hedge accounting affecting accrued interest
to date of early termination of cross currency interest
rate swap agreements 14.0 14.0 --
--------------------------------------------------------------------------------------------------------------------------------
$ 354.6 $ 328.8 25.8
=================================================================================================
Amortization for the year ended
December 31, 2006 15.5
----------------------------------------------------------------
Prepaid expense arising from early
termination of cross currency interest
rate swap agreements, December 31, 2006 $ 10.3
=================================================================
(1) Amounts paid in advance represent present value of cash flows, at early
termination date, which would have arisen pursuant to early terminated cross
currency interest rate swap agreements.
(2) Had the early terminated cross currency interest rate swap agreements
matured in the normal course, the associated period amounts that would have
been recorded would equal the future value of the amounts to currently be
deferred and amortized (assuming that the associated future exchange and
interest rates over the period to maturity of the 2007 (U.S. Dollar) Notes
would be equal to those at the date of early termination of the cross currency
interest rate swap agreements).
The weighted average effective fixed interest rates and effective fixed
exchange rates arising from the cross currency interest rate swap agreements
are summarized in the following table:
As at December 31 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Effective fixed Effective fixed
Effective fixed exchange rate Effective fixed exchange rate
interest rate ($: U.S.$1.00) interest rate ($: U.S.$1.00)
--------------------------------------------------------------------------------------------------------------------------------
2007 (U.S. Dollar) Notes 7.046% $ 1.2716 8.109% $ 1.5414
2011 (U.S. Dollar) Notes 8.493% $ 1.5327 8.493% $ 1.5327
--------------------------------------------------------------------------------------------------------------------------------
The counterparties of the swap agreements are highly rated financial
institutions and the Company does not anticipate any non-performance. TELUS
has not required collateral or other security from the counterparties due to
its assessment of their creditworthiness.
The Company translates items such as the U.S. Dollar notes into equivalent
Canadian dollars at the rate of exchange in effect at the balance sheet date.
The swap agreements at December 31, 2006, comprised a net deferred hedging
liability of $835.7 million, as set out in Note 20(b) (2005 -- $1,154.3
million). The asset value of the swap agreements increases (decreases) when
the balance sheet date exchange rate increases (decreases) the Canadian dollar
equivalent of the U.S. Dollar notes.
2013 (Canadian Dollar) Notes: In May 2006, the Company publicly issued $300
million 5.00%, Series CB, Notes at a price of $998.80 per $1,000.00 of
principal. The notes are redeemable at the option of the Company, in whole at
any time, or in part from time to time, on not fewer than 30 and not more than
60 days' prior notice, at a redemption price equal to the greater of (i) the
present value of the notes discounted at the Government of Canada yield plus
16 basis points, or (ii) 100% of the principal amount thereof. In addition,
accrued and unpaid interest, if any, will be paid to the date fixed for
redemption.
2006 (Canadian Dollar) Notes: In May 2001, the Company issued $1.6 billion
7.50%, Series CA, Notes at a price of $992.30 per $1,000.00 of principal to
the public. The notes were redeemable at the option of the Company, in whole
at any time, or in part from time to time, on not fewer than 30 and not more
than 60 days' prior notice, at a redemption price equal to the greater of (i)
the present value of the notes discounted at the Government of Canada yield
plus 35 basis points, or (ii) 100% of the principal amount thereof. In
addition, accrued and unpaid interest, if any, will be paid to the date fixed
for redemption.
During the third quarter of 2002, the Company repurchased 7.50%, Series CA,
Notes with a face value of $22.0 million and on October 17, 2005, the Company
exercised its right to early redeem, on December 1, 2005, the remaining
$1,578.0 million of 7.50%, Series CA, Notes outstanding. The loss on
redemption, as set out in Note 8, was $33.5 million.
2006 Interest Rate Swap Agreements: In 2004 the Company entered into a
series of interest rate swap agreements which resulted in the notional
conversion of $500 million of the 7.50%, Series CA, Notes from a fixed
interest rate of 7.5% to a floating interest rate based upon the three-month
Banker's Acceptance Canadian Dollar Offered Rate plus a spread. The
counterparties of the swap agreements were highly rated financial institutions
and the Company did not anticipate any non-performance. TELUS had not required
collateral or other security from the counterparties due to its assessment of
their creditworthiness. The swap agreements were terminated concurrent with
the redemption of the 7.50%, Series CA, Notes.
(c) TELUS Corporation credit facilities
On May 4, 2005, TELUS Corporation entered into a $1.6 billion bank credit
facility with a syndicate of financial institutions. The credit facilities
consist of: (i) an $800 million (or U.S. Dollar equivalent) revolving credit
facility expiring on May 7, 2008, to be used for general corporate purposes,
and (ii) an $800 million (or U.S. Dollar equivalent) revolving credit facility
expiring on May 4, 2010, to be used for general corporate purposes. These
facilities replaced the Company's pre-existing committed credit facilities
prior to the availability termination dates of such facilities.
TELUS Corporation's credit facilities are unsecured and bear interest at
prime rate, U.S. Dollar Base Rate, a bankers' acceptance rate or London
interbank offered rate ("LIBOR") (all such terms as used or defined in the
credit facilities), plus applicable margins. The credit facilities contain
customary representations, warranties and covenants including two financial
quarter end financial ratio tests. The financial ratio tests are that the
Company may not permit its net debt to operating cash flow ratio to exceed
4.0:1 and may not permit its operating cash flow to interest expense ratio to
be less than 2.0:1, each as defined under the credit facilities.
Continued access to TELUS Corporation's credit facilities is not contingent
on the maintenance by TELUS Corporation of a specific credit rating.
As at December 31 (millions) 2006 2005
------------------------------------------------------------------------ ----------------------------------------------------
Outstanding, Outstanding,
Gross undrawn Net Gross undrawn Net
available Drawn letters of credit available available Drawn letters of credit available
--------------------------------------------------------------------------------------------------------------------------------
Revolving credit
facility expiring
May 7, 2008 $ 800.0 $ 120.0 $ 100.1 $ 579.9 $ 800.0 $ 142.0 $ 100.6 $ 557.4
May 4, 2010 800.0 -- -- 800.0 800.0 -- -- 800.0
--------------------------------------------------------------------------------------------------------------------------------
$1,600.0 $ 120.0 $ 100.1 $1,379.9 $1,600.0 $ 142.0 $ 100.6 $1,357.4
=================================================================================================================================
(d) TELUS Communications Inc. debentures
The outstanding Series 1 through 5 debentures were issued by BC TEL, a
predecessor corporation of TELUS Communications Inc., under a Trust Indenture
dated May 31, 1990, and are non-redeemable.
The outstanding Series B Debentures were issued by AGT Limited, a predecessor
corporation of TELUS Communications Inc., under a Trust Indenture dated August
24, 1994, and a supplemental trust indenture dated September 22, 1995. They
are redeemable at the option of the Company, in whole at any time or in part
from time to time, on not less than 30 days' notice at the higher of par and
the price calculated to provide the Government of Canada Yield plus 15 basis
points.
Pursuant to an amalgamation on January 1, 2001, the Debentures became
obligations of TELUS Communications Inc. The debentures are not secured by any
mortgage, pledge or other charge and are governed by certain covenants
including a negative pledge and a limitation on issues of additional debt,
subject to a debt to capitalization ratio and interest coverage test.
(e) TELUS Communications Inc. first mortgage bonds
The first mortgage bonds were issued by TELUS Communications (Quebec) Inc. and
are secured by an immovable hypothec and by a movable hypothec charging
specifically certain immovable and movable property of the subsidiary TELUS
Communications Inc., such as land, buildings, equipment, apparatus, telephone
lines, rights-of-way and similar rights limited to certain assets located in
the province of Quebec. The first mortgage bonds are not redeemable prior to
maturity. Pursuant to a corporate reorganization effected July 1, 2004, the
outstanding first mortgage bonds became obligations of TELUS Communications
Inc.
(f) TELUS Communications Inc. medium term notes
The medium term notes were issued by TELUS Communications (Quebec) Inc. under
a trust indenture dated September 1, 1994, as supplemented from time to time,
are unsecured and are not redeemable prior to maturity. New issues of medium
term notes are subject to restrictions as to debt ratio and interest coverage.
Pursuant to a corporate reorganization effected July 1, 2004, the outstanding
medium term notes became obligations of TELUS Communications Inc.
(g) TELUS Corporation convertible debentures
The 6.75% convertible debentures were unsecured, subordinated obligations of
the Company that were to mature on June 15, 2010, and were convertible at the
holders' option into Non-Voting Shares of the Company at a rate reflecting a
share price of $39.73. The convertible debentures were not redeemable prior to
June 15, 2003. Redemption in the period from June 15, 2003, through June 15,
2005, was allowed if the average trading price of the Non-Voting Shares for a
defined period exceeds 125% of the conversion price.
The holder's embedded conversion option was valued using the residual value
approach and was presented as a component of shareholders' equity.
On May 9, 2005, the Company provided notice of redemption for its convertible
debentures at par, plus accrued and unpaid interest, for redemption on June
16, 2005. Convertible debenture holders exercised conversion options resulting
in $131.7 million of convertible debenture principal being converted into
3,316,047 Non-Voting Shares. The conversion option in respect of $17.9 million
of convertible debenture principal was not exercised and this principal amount
was redeemed on June 16, 2005.
(h) Long-term debt maturities
Anticipated requirements to meet long-term debt repayments, including related
hedge amounts and calculated upon such long-term debts owing as at December
31, 2006, during each of the five years ending December 31 are as follows:
(millions) Deferred hedging
Principal(1) liability, net Total
--------------------------------------------------------------------------------------------------------------------------------
2007 $ 1,436.1 $ 122.9 $ 1,559.0
2008 124.8 -- 124.8
2009 1.5 -- 1.5
2010 81.7 -- 81.7
2011 2,240.3 710.3 2,950.6
---------------------------------------------------------------------------------------------------------------------------------
(1)Where applicable, principal repayments reflect foreign exchange rates
at December 31, 2006.
18 shareholders' equity
(a) Details of shareholders' equity
As at December 31 ($ in millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Preferred equity
Authorized Amount
First Preferred Shares 1,000,000,000
Second Preferred Shares 1,000,000,000
Common equity
Share capital
Shares
Authorized Amount
Common Shares 1,000,000,000
Non-Voting Shares 1,000,000,000
Issued
Common Shares (b) $ 2,264.4 $ 2,311.6
Non-Voting Shares (b) 3,420.8 3,556.7
---------------------------------------------------------------------------------------------------------------------------------
5,685.2 5,868.3
---------------------------------------------------------------------------------------------------------------------------------
Options (c) 0.8 5.9
Cumulative foreign currency translation adjustment (1.5) (7.3)
Retained earnings 1,080.1 849.7
Contributed surplus (d) 163.5 153.4
---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 6,928.1 $ 6,870.0
=================================================================================================================================
(b) Changes in Common Shares and Non-Voting Shares
Years ended December 31 ($ in millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Number of shares Share capital Number of shares Share capital
--------------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 183,530,655 $ 2,311.6 192,748,738 $ 2,407.5
Common Shares issued pursuant to exercise of
share options (e) 627,779 21.9 1,000,328 32.2
Purchase of shares for cancellation pursuant to
normal course issuer bid (f) (5,490,600) (69.1) (10,137,769) (127.1)
Expiration of predecessor share exchange privilege (g) -- -- (80,642) (1.0)
--------------------------------------------------------------------------------------------------------------------------------
End of period 178,667,834 $ 2,264.4 183,530,655 $ 2,311.6
=================================================================================================================================
Non-Voting Shares
Beginning of period 166,566,504 $ 3,556.7 165,803,123 $ 3,426.7
Non-Voting Shares issued pursuant to exercise of
share options (e) 3,190,967 94.2 7,556,004 200.4
Non-Voting Shares issued pursuant to use of share
option award net-equity settlement feature (e) 371,386 2.4 -- --
Purchase of shares for cancellation pursuant to
normal course issuer bid (f) (10,888,123) (232.5) (10,656,300) (223.9)
Exercise of warrants (c) -- -- 561,732 20.8
Expiration of predecessor share exchange privilege (g) -- -- (26,327) (0.6)
Channel stock incentive plan (h) -- -- 12,225 0.4
Exercise of convertible debenture conversion
option (Note 17(g)) -- -- 3,316,047 132.9
---------------------------------------------------------------------------------------------------------------------------------
End of period 159,240,734 $3,420.8 166,566,504 $ 3,556.7
=================================================================================================================================
Amounts credited to the Common Share capital account upon exercise of share
options are cash received. Amounts credited to the Non-Voting Share capital
account are comprised as follows:
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Non-Voting Shares issued pursuant to exercise of share options
Cash received from exercise of share options $ 82.6 $ 180.3
Amounts credited to share capital arising from intrinsic value accounting
applied to former Clearnet Communications Inc. options (c) 5.0 9.1
Share option award expense reclassified from contributed surplus upon exercise
of share options (d) 6.6 11.0
---------------------------------------------------------------------------------------------------------------------------------
$ 94.2 $ 200.4
=================================================================================================================================
(c) Options and warrants
Upon its acquisition of Clearnet Communications Inc. in 2000, the Company was
required to record the intrinsic value of Clearnet Communications Inc. options
and warrants outstanding at that time. As these options and warrants are
exercised, the corresponding intrinsic values are reclassified to share
capital. As these options and warrants are forfeited, or as they expire, the
corresponding intrinsic values are reclassified to contributed surplus.
Proceeds arising from the exercise of these options and warrants are credited
to share capital.
Under the terms of the arrangement to acquire Clearnet Communications Inc.,
effective January 18, 2001, TELUS Corporation exchanged the warrants held by
former Clearnet Communications Inc. warrant holders. Each warrant entitled the
holder to purchase a Non-Voting Share at a price of U.S.$10.00 per share until
September 15, 2005.
(d) Contributed surplus
The following table presents a summary of the activity related to the Company's
contributed surplus for the years ended December 31.
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 153.4 $ 149.0
Share option award expense
- Recognized in period (Note 11(a)) 19.0 14.2
- Reclassified to Non-Voting Share capital account
- Upon exercise of share options (6.6) (11.0)
- Upon use of share option award net-equity settlement feature (2.4) --
Amounts credited to contributed surplus arising from intrinsic value accounting
applied to former Clearnet Communications Inc. options (c) 0.1 --
Unexercised, expired convertible debenture conversion option -- 1.2
---------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 163.5 $ 153.4
=================================================================================================================================
(e) Share option plans
The Company has a number of share option plans under which officers and other
employees may receive options to purchase Non-Voting Shares at a price equal
to the fair market value at the time of grant; prior to 2001, options were
also similarly awarded in respect of Common Shares. Prior to 2002, directors
were also awarded options to purchase Non-Voting Shares and Common Shares at a
price equal to the fair market value at the time of grant. Option awards
currently granted under the plans may be exercised over specific periods not
to exceed seven years from the time of grant; prior to 2003, share option
awards were granted with exercise periods not to exceed ten years.
The following table presents a summary of the activity related to the
Company's share option plans for the years ended December 31.
Years ended December 31 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Number of Weighted Number of Weighted
share average share share average share
options option price options option price
--------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 13,894,601 $ 28.14 21,914,760 $ 26.07
Granted 1,627,132 43.66 1,916,575 38.85
Exercised(1) (4,365,475) 25.94 (8,556,332) 24.84
Forfeited (586,796) 27.78 (1,239,547) 29.22
Expired and cancelled -- -- (140,855) 41.63
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 10,569,462 $ 31.46 13,894,601 $ 28.14
=================================================================================================================================
(1)The total intrinsic value of share option awards exercised for the year
ended December 31, 2006, was $105.7 million (2005 -- $128.5 million).
In 2006, certain outstanding grants of share option awards, which were made
after 2001, had a net-equity settlement feature applied to them. This event
does not result in the optionees receiving incremental value and therefore
modification accounting is not required for it. The optionee does not have the
choice of exercising the net-equity settlement feature. It is at the Company's
discretion whether an exercise of the share option award is settled as a share
option or using the net-equity settlement feature. Subsequent to December 31,
2006, certain outstanding grants of share option awards had a net-cash
settlement feature applied to them, as further discussed in Note 11(b); the
optionee has the choice of exercising the net-cash settlement feature.
The following table reconciles the number of share options exercised and the
associated number of Common Shares and Non-Voting Shares issued.
Year ended December 31 2006 2005
---------------------------------------------------------------------------------------------------------------------------------
Non-Voting Shares issued pursuant to exercise of share option awards 3,190,967 7,556,004
Non-Voting Shares issued pursuant to use of share option award net-equity
settlement feature 371,386 --
Impact of Company choosing to settle share option award exercises using net-equity
settlement feature 175,343 --
---------------------------------------------------------------------------------------------------------------------------------
Non-Voting Shares issuable pursuant to exercising of share option awards 3,737,696 7,556,004
Common Shares issued and issuable pursuant to exercise of share option awards 627,779 1,000,328
---------------------------------------------------------------------------------------------------------------------------------
Share option awards exercised 4,365,475 8,556,332
=================================================================================================================================
The following is a life and exercise price stratification of the Company's
share options outstanding as at December 31, 2006.
Options outstanding(1) Options exercisable
------------------------------------------------------------------------------------------------------ ------------------------
Range of option prices Total
------------------------------------------------------------------------------------------------------ ------------------------
Weighted
Low $ 5.95 $ 9.14 $ 14.63 $ 21.99 $ 34.88 $ 54.45 $ 5.95 Number of average
High $ 8.43 $ 13.56 $ 19.92 $ 32.83 $ 47.22 $ 57.37 $ 57.37 shares price
Year of expiry and ------------------------
number of shares
------------------------------------------------------------------------------------------------------
2007 2,959 5,908 -- 23,266 -- -- 32,133 32,133 $ 24.83
2008 3,272 -- -- 42,880 80,800 -- 126,952 126,952 $ 40.26
2009 -- 3,644 541,982 126,443 130,782 -- 802,851 802,851 $ 21.48
2010 -- -- 127,076 1,531,576 452,891 -- 2,111,543 2,111,543 $ 26.64
2011 -- -- 5,366 2,380,788 1,400,438 -- 3,786,592 2,301,628 $ 30.69
2012 11,066 9,267 212,033 75,000 1,793,692 -- 2,101,058 307,366 $ 17.61
2013 -- -- -- -- 1,541,626 66,707 1,608,333 -- --
-------------------------------------------------------------------------------------------------------------------
17,297 18,819 886,457 4,179,953 5,400,229 66,707 10,569,462 5,682,473 $ 27.36
===================================================================================================================
Weighted average
remaining contractual
life (years) 4.0 3.6 3.7 4.1 5.0 6.9 4.6
Weighted average price $7.68 $10.39 $16.01 $24.60 $39.17 $55.39 $31.46
Aggregate intrinsic
value(2) (millions) $0.8 $0.8 $31.9 $115.0 $70.4 $ -- $218.9
Options exercisable
------------------------------------------------------------------------------------------------------
Number of shares 17,297 18,819 886,457 2,694,989 2,064,911 -- 5,682,473
Weighted average
remaining contractual
life (years) 4.0 3.6 3.7 4.1 3.8 -- 3.9
Weighted average price $7.68 $10.39 $16.01 $24.51 $36.26 $ -- $27.36
Aggregate intrinsic
value(2) (millions) $0.8 $0.8 $31.9 $74.5 $33.5 -- $141.5
(1) As at December 31, 2006, 10,317,956 share options, with a weighted average
remaining contractual life of 4.5 years, a weighted average price of $31.17
and an aggregate intrinsic value of $216.7 million, are vested or were
expected to vest.
(2) The aggregate intrinsic value is calculated upon December 31, 2006, per
share prices of $53.52 for Common Shares and $52.03 for Non-Voting Shares.
As at December 31, 2006, 0.8 million Common Shares and 18.5 million Non-
Voting Shares were reserved for issuance, from Treasury, under the share
option plans.
(f) Purchase of shares for cancellation pursuant to normal course issuer bid
The Company purchased, for cancellation, through the facilities of the Toronto
Stock Exchange, Common Shares and Non-Voting Shares pursuant to successive
normal course issuer bids; the Company's most current normal course issuer bid
runs for a twelve-month period ending December 19, 2007, for up to 12.0
million Common Shares and 12.0 million Non-Voting Shares. The excess of the
purchase price over the average stated value of shares purchased for
cancellation was charged to retained earnings. The Company ceases to consider
shares outstanding on the date of the Company's purchase of its shares
although the actual cancellation of the shares by the transfer agent and
registrar occurs on a timely basis on a date shortly thereafter. As at
December 31, 2006, NIL Common Shares (2005 -- 120,000 Common Shares) and
103,923 Non-Voting Shares (2005 -- 607,700 Non-Voting Shares) had been
purchased and not yet cancelled.
Years ended December 31 ($ in millions)
--------------------------------------------------------------------------------------------------------------------------------
Purchase price
--------------------------------------------------------------------------------------------------------------------------------
Number of Charged to Charged to
shares Paid share capital retained earnings
--------------------------------------------------------------------------------------------------------------------------------
Common Shares purchased for cancellation
Program commencing December 20, 2004
During fiscal 2004 year 755,711 $ 27.3 $ 9.4 $ 17.9
During fiscal 2005 year 9,503,300 412.5 119.1 293.4
---------------------------------------------------------------------------------------------------------------------------------
Program total 10,259,011 439.8 128.5 311.3
---------------------------------------------------------------------------------------------------------------------------------
Program commencing December 20, 2005
During fiscal 2005 year 634,469 29.7 8.0 21.7
During fiscal 2006 year 5,490,600 260.4 69.1 191.3
---------------------------------------------------------------------------------------------------------------------------------
Program total 6,125,069 290.1 77.1 213.0
---------------------------------------------------------------------------------------------------------------------------------
Program commencing December 20, 2006
During fiscal 2006 year -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
All programs -- inception to date 16,384,080 $ 729.9 $ 205.6 $ 524.3
=================================================================================================================================
All programs -- during fiscal 2006 year 5,490,600 $ 260.4 $ 69.1 $ 191.3
=================================================================================================================================
All programs -- during fiscal 2005 year 10,137,769 $ 442.2 $ 127.1 $ 315.1
=================================================================================================================================
Non-Voting Shares purchased for cancellation
Program commencing December 20, 2004
During fiscal 2004 year 1,451,400 $ 50.7 $ 30.0 $ 20.7
During fiscal 2005 year 10,048,600 422.1 211.0 211.1
--------------------------------------------------------------------------------------------------------------------------------
Program total 11,500,000 472.8 241.0 231.8
--------------------------------------------------------------------------------------------------------------------------------
Program commencing December 20, 2005
During fiscal 2005 year 607,700 27.8 12.9 14.9
During fiscal 2006 year 10,701,400 530.0 228.5 301.5
--------------------------------------------------------------------------------------------------------------------------------
Program total 11,309,100 557.8 241.4 316.4
--------------------------------------------------------------------------------------------------------------------------------
Program commencing December 20, 2006
During fiscal 2006 year 186,723 9.8 4.0 5.8
---------------------------------------------------------------------------------------------------------------------------------
All programs -- inception to date 22,995,823 $ 1,040.4 $ 486.4 $ 554.0
=================================================================================================================================
All programs -- during fiscal 2006 year 10,888,123 $ 539.8 $ 232.5 $ 307.3
=================================================================================================================================
All programs -- during fiscal 2005 year 10,656,300 $ 449.9 $ 223.9 $ 226.0
=================================================================================================================================
Common Shares and Non-Voting Shares
purchased for cancellation
Program commencing December 20, 2004
During fiscal 2004 year 2,207,111 $ 78.0 $ 39.4 $ 38.6
During fiscal 2005 year 19,551,900 834.6 330.1 504.5
---------------------------------------------------------------------------------------------------------------------------------
Program total 21,759,011 912.6 369.5 543.1
---------------------------------------------------------------------------------------------------------------------------------
Program commencing December 20, 2005
During fiscal 2005 year 1,242,169 57.5 20.9 36.6
During fiscal 2006 year 16,192,000 790.4 297.6 492.8
---------------------------------------------------------------------------------------------------------------------------------
Program total 17,434,169 847.9 318.5 529.4
---------------------------------------------------------------------------------------------------------------------------------
Program commencing December 20, 2006
During fiscal 2006 year 186,723 9.8 4.0 5.8
---------------------------------------------------------------------------------------------------------------------------------
All programs -- inception to date 39,379,903 $ 1,770.3 $ 692.0 $ 1,078.3
=================================================================================================================================
All programs -- during fiscal 2006 year 16,378,723 $ 800.2 $ 301.6 $ 498.6
=================================================================================================================================
All programs -- during fiscal 2005 year 20,794,069 $ 892.1 $ 351.0 $ 541.1
=================================================================================================================================
(g) Expiration of predecessor share exchange privilege
As set out in the Joint Management Proxy Circular of December 8, 1998, holders
of BC TELECOM Inc. Common Shares and holders of Alberta-based TELUS
Corporation Common Shares had six years to exchange their shares for shares
that have become what are now the Company's Common Shares and Non-Voting
Shares; such period elapsed on January 31, 2005. The amounts corresponding
with the unexchanged shares have been removed from the equity accounts.
(h) Channel stock incentive plan
The Company initiated the Plan to increase sales of various products and
services by providing additional performance-based compensation in the form of
Non-Voting Shares. During the first half of 2005, terms of the Plan were
amended such that the Non-Voting Shares earned were no longer to be issued
from Treasury and, as a result, as at December 31, 2005, Non-Voting Shares
earned were no longer accrued as a component of Common Equity.
(i) Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which
eligible shareholders may acquire Non-Voting Shares through the reinvestment
of dividends and additional optional cash payments. Excluding Non-Voting
Shares purchased by way of additional optional cash payments, the Company, at
its discretion, may offer the Non-Voting Shares at up to a 5% discount from
the market price. During the years ended December 31, 2006 and 2005, the
Company did not offer Non-Voting Shares at a discount. Shares purchased
through optional cash payments are subject to a minimum investment of $100 per
transaction and a maximum investment of $20,000 per calendar year.
Under this Plan, the Company has the option of offering shares from Treasury
or having the trustee acquire shares in the stock market. Prior to July 1,
2001, when the acquisition of shares from Treasury commenced, all Non-Voting
Shares were acquired in the market at normal trading prices; acquisition in
the market at normal trading prices recommenced on January 1, 2005.
In respect of Common Share and Non-Voting Share dividends declared during the
year ended December 31, 2006, $7.4 million (2005 -- $5.7 million) was to be
reinvested in Non-Voting Shares.
19 commitments and contingent liabilities
(a) Canadian Radio-television Telecommunications Commission Decisions 2002-34,
2002-43 and 2006-9 deferral accounts
On May 30, 2002, and on July 31, 2002, the CRTC issued Decisions 2002-34 and
2002-43, respectively, and introduced the concept of a deferral account. The
Company must make significant estimates and assumptions in respect of the
deferral accounts given the complexity and interpretation required of
Decisions 2002-34 and 2002-43. Accordingly, the Company estimates, and
records, an aggregate liability of $164.8 million as at December 31, 2006
(2005 -- $158.7 million), to the extent that activities it has undertaken,
other qualifying events and realized rate reductions for Competitor Services
do not extinguish it; management is required to make estimates and assumptions
in respect of the offsetting nature of these items. If the CRTC, upon its
periodic review of the Company's deferral account, disagrees with management's
estimates and assumptions, the CRTC may adjust the deferral account balance
and such adjustment may be material. Ultimately, this process results in the
CRTC determining if, and when, the deferral account liability is settled.
On March 24, 2004, the CRTC issued Telecom Public Notice CRTC 2004-1 "Review
and disposition of the deferral accounts for the second price cap period",
which initiated a public proceeding inviting proposals on the disposition of
the amounts accumulated in the incumbent local exchange carriers' deferral
accounts during the first two years of the second price cap period.
On February 16, 2006, the CRTC issued Decision CRTC 2006-9, "Disposition of
funds in the deferral account". In its decision the CRTC determined that the
majority of the accumulated liability within the respective incumbent local
exchange carrier's deferral account was to be made available for initiatives
to expand broadband services within their incumbent local exchange carrier
operating territories to rural and remote communities where service is
currently not available. In addition, a minimum of five per cent of the
accumulated deferral account balance must be used for initiatives that enhance
accessibility to telecommunications services for individuals with disabilities.
To the extent that the deferral account balance exceeds the approved
initiatives, the remaining balance will be distributed in the form of a
one-time rebate to local residential service customers in non-high cost
serving areas. Finally, the CRTC indicated that subsequent to May 31, 2006, no
additional amounts are to be added to the deferral account and, instead, are
to be dealt with via prospective rate reductions.
In September 2006, the Federal Court of Appeal granted the Consumers
Association of Canada and the National Anti-Poverty Organization leave to
appeal CRTC Telecom Decision 2006-9. These consumer groups are expected to
file their appeal over the coming months asking the Court to direct rebates to
local telephone subscribers, rather than have the accumulated deferral account
funds used for purposes determined by the CRTC, as noted above. Bell Canada
was also granted leave to appeal Decision 2006-9 on the grounds that the CRTC
exceeded its jurisdiction to the extent it approves rebates from the deferral
account. These matters are expected to be heard in 2007. In the event that
Bell Canada is successful in its appeal, the Company may realize additional
revenue equal to the amount of the deferral account that would otherwise have
been rebated by the CRTC. Should the consumer groups be successful in their
appeals, the Company may be required to remit a one-time refund of an amount
up to, but not exceeding, the aggregate liability of approximately $165
million in individually small amounts to its entire local residential
subscriber base. As the deferral account balance was fully provided for in
previous financial statements, the potential refund will not impact the
Company's subsequent income from operations. In addition, subject to the
potential outcome of this leave to appeal, the Company may need to re-address
its intent to extend broadband services to uneconomic remote and rural
communities. The Company supports Decision 2006-9 and its designated uses of
the deferral account in order to extend high-speed broadband internet service
to rural and remote communities and improve telecommunications services for
people with disabilities.
Due to the Company's use of the liability method of accounting for the
deferral account, the CRTC Decision 2005-6, as it relates to the Company's
provision of Competitor Digital Network services, is not expected to affect
the Company's consolidated revenues. Specifically, to the extent that the CRTC
Decision 2005-6 requires the Company to provide discounts on Competitor
Digital Network services, through May 31, 2006, the Company drew down the
deferral account by an offsetting amount; subsequent to May 31, 2006, the
income statement effects did not change and the Company no longer needed to
account for these amounts through the deferral account. For the year ended
December 31, 2006, the Company drew down the deferral account by $19.9 million
(2005 -- $50.5 million) in respect of discounts on Competitor Digital Network
services.
On November 30, 2006, the CRTC issued Telecom Public Notice CRTC 2006-15,
"Review of proposals to dispose of the funds accumulated in the deferral
accounts", which initiated a public proceeding to consider the proposals
submitted by the incumbent local exchange carriers to dispose of the funds
accumulated in their respective deferral accounts. The Company expects the
CRTC to render its decision in this matter in the latter part of 2007.
(b) Contractual obligations
The Company's known contractual obligations at December 31, 2006, are as
follows:
Long-term debt maturities(1)
(see Note 17(h))
------------------------------- Other long-term Operating
All except liabilities(2) leases Purchase
(millions) capital leases Capital leases (see Note 20(b)) (see Note 19(c)) obligations(3) Total
--------------------------------------------------------------------------------------------------------------------------------
2007 $ 1,555.0 $ 4.0 $ 18.0 $ 197.6 $ 506.6 $ 2,281.2
2008 122.2 2.6 23.1 184.9 127.2 460.0
2009 0.7 0.8 28.2 198.3 73.7 301.7
2010 80.0 1.7 17.6 185.5 30.8 315.6
2011 2,950.5 0.1 17.7 168.3 11.5 3,148.1
Thereafter 1,049.0 -- 150.7 1,202.6 33.8 2,436.1
--------------------------------------------------------------------------------------------------------------------------------
Total $ 5,757.4 $ 9.2 $ 255.3 $ 2,137.2 $ 783.6 $ 8,942.7
================================================================================================================================
(1)Where applicable, long-term debt maturities reflect hedged foreign exchange
rates.
(2)Items that do not result in a future outlay of economic resources, such as
deferred gains on sale-leasebacks of buildings and deferred customer
activation and connection fees, have been excluded. As long-term debt
maturities reflect hedged foreign exchange rates, the deferred hedging
liability is included therein. Funding of pension and other benefit plans has
been included for 2006 for all plans that have a net accrued benefit liability
position as at the current year end; only funding of unfunded plans has been
included in years subsequent to 2006, up to the liability recognized at the
current year end.
(3)Where applicable, purchase obligations reflect foreign exchange rates as at
the current year end. Purchase obligations include both future operating and
capital expenditures that have been contracted for as at the current year end
and include most likely estimates of prices and volumes where necessary. As
purchase obligations reflect market conditions at the time the obligation was
incurred for the items being purchased, they may not be representative of
future years. Excepting a significant, multi-year information technology
services agreement, obligations arising from personnel supply contracts and
other such labour agreements have been excluded.
(c) Leases
The Company occupies leased premises in various centres and has land,
buildings and equipment under operating leases. As a result of the
consolidation of leased premises arising from various initiatives, some of the
leased building premises were sub-let. At December 31, 2006, the future
minimum lease payments under capital leases and operating leases, and future
receipts from real estate operating sub-leases, are as follows:
Operating lease payments
----------------------------------------------------------------------- Operating
Land and buildings lease
Capital ------------------------------------------ Vehicles receipts from
lease Occupancy and other sub-let land
(millions) payments Rent costs Gross equipment Total and buildings
---------------------------------------------------------------------------------------------------------------------------------
2007 $ 4.3 $ 118.4 $ 60.4 $ 178.8 $ 18.8 $ 197.6 $ 1.7
2008 3.1 110.7 62.0 172.7 12.2 184.9 1.6
2009 1.0 116.7 72.8 189.5 8.8 198.3 1.4
2010 1.8 106.1 71.4 177.5 8.0 185.5 0.8
2011 0.2 91.8 72.0 163.8 4.5 168.3 0.5
---------------------------------------------------------------------------------------------------------------------------------
Total future minimum
lease payments 10.4
Less imputed interest 1.2
---------------------------------------------------------------------------------------------------------------------------------
Capital lease liability $ 9.2
=================================================================================================================================
Total future minimum operating lease payments at December 31, 2006, were
$2,137.2 million. Of this amount, $2,083.6 million was in respect land and
buildings; approximately 60% of this amount was in respect of the Company's
five largest leases, all of which were for office premises over various terms,
none of which expire after 2024.
(d) Guarantees
Canadian generally accepted accounting principles require the disclosure of
certain types of guarantees and their maximum, undiscounted amounts. The
maximum potential payments represent a "worst-case scenario" and do not
necessarily reflect results expected by the Company. Guarantees requiring
disclosure are those obligations that require payments contingent on specified
types of future events. In the normal course of its operations, the Company
enters into obligations that GAAP may consider to be guarantees. As defined by
Canadian GAAP, guarantees subject to these disclosure guidelines do not
include guarantees that relate to the future performance of the Company.
Performance guarantees: Performance guarantees contingently require a
guarantor to make payments to a guaranteed party based on a third party's
failure to perform under an obligating agreement. TELUS provides sales price
guarantees in respect of employees' principal residences as part of its
employee relocation policies. In the event that the Company is required to
honour such guarantees, it purchases (for immediate resale) the property from
the employee.
The Company has guaranteed third parties' financial obligations as part of a
facility naming rights agreement. The guarantees, in total, run through to
August 31, 2008, on a declining-balance basis and are of limited recourse.
As at December 31, 2006, the Company has no liability recorded in respect of
the aforementioned performance guarantees.
Financial guarantees: In conjunction with its 2001 exit from the equipment
leasing business, the Company provided a guarantee to a third party with
respect to certain specified telecommunications asset and vehicle leases. If
the lessee were to default, the Company would be required to make a payment to
the extent that the realized value of the underlying asset is insufficient to
pay out the lease; in some instances, the Company could be required to pay out
the lease on a gross basis and realize the underlying value of the leased
asset itself. As at December 31, 2006, the Company has a liability of $0.2
million (2005 -- $0.5 million) recorded in respect of these lease guarantees.
The following table quantifies the maximum undiscounted guarantee amounts as
at December 31, 2006, without regard for the likelihood of having to make such
payment.
(millions) Performance Financial
guarantees(1) guarantees(1) Total
---------------------------------------------------------------------------------------------------------------------------------
2007 $ 1.6 $ 0.4 $ 2.0
2008 0.5 0.2 0.7
---------------------------------------------------------------------------------------------------------------------------------
(1) Annual amounts for performance guarantees and financial guarantees include
the maximum guarantee amounts during any year of the term of the guarantee.
Indemnification obligations: In the normal course of operations, the Company
may provide indemnification in conjunction with certain transactions. The term
of these indemnification obligations range in duration and often are not
explicitly defined. Where appropriate, an indemnification obligation is
recorded as a liability. In many cases, there is no maximum limit on these
indemnification obligations and the overall maximum amount of the obligations
under such indemnification obligations cannot be reasonably estimated. Other
than obligations recorded as liabilities at the time of the transaction,
historically the Company has not made significant payments under these
indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the new owner's increased
directory publication costs if the increased costs were to arise from a change
in the applicable CRTC regulatory requirements. The Company's proportionate
share would have been 80% through May 2006, declining to 40% in the next
five-year period and then to 15% in the final five years. As well, should the
CRTC take any action which would result in the owner being prevented from
carrying on the directory business as specified in the agreement, TELUS would
indemnify the owner in respect of any losses that the owner incurred.
As at December 31, 2006, the Company has no liability recorded in respect of
indemnification obligations.
(e) Claims and lawsuits
General: A number of claims and lawsuits seeking damages and other relief are
pending against the Company. It is impossible at this time for the Company to
predict with any certainty the outcome of such litigation. However, management
is of the opinion, based upon legal assessment and information presently
available, that it is unlikely that any liability, to the extent not provided
for through insurance or otherwise, would be material in relation to the
Company's consolidated financial position, excepting the items enumerated
following.
Pay equity: On December 16, 1994, the Telecommunications Workers Union filed
a complaint against BC TEL, a predecessor of TELUS Communications Inc., with
the Canadian Human Rights Commission, alleging that wage differences between
unionized male and female employees in British Columbia were contrary to the
equal pay for work of equal value provisions in the Canadian Human Rights Act.
As a term of the settlement between TELUS Communications Inc. and the
Telecommunications Workers Union that resulted in the collective agreement
effective November 20, 2005, the parties have agreed to settle this complaint
without any admission of liability, on the basis that the Company will
establish a pay equity fund of $10 million to be paid out during the term of
the new collective agreement; the Telecommunications Workers Union withdrew
and discontinued this complaint on December 21, 2005. During the first quarter
of 2006, the Canadian Human Rights Commission advised the Company that it
accepted this settlement and that it would close its file on the complaint.
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan: Two
statements of claim were filed in the Alberta Court of Queen's Bench on
December 31, 2001, and January 2, 2002, respectively, by plaintiffs alleging
to be either members or business agents of the Telecommunications Workers
Union. In one action, the three plaintiffs alleged to be suing on behalf of
all current or future beneficiaries of the TELUS Corporation Pension Plan and
in the other action, the two plaintiffs alleged to be suing on behalf of all
current or future beneficiaries of the TELUS Edmonton Pension Plan. The
statement of claim in the TELUS Corporation Pension Plan related action named
the Company, certain of its affiliates and certain present and former trustees
of the TELUS Corporation Pension Plan as defendants, and claims damages in the
sum of $445 million. The statement of claim in the TELUS Edmonton Pension Plan
related action named the Company, certain of its affiliates and certain
individuals who are alleged to be trustees of the TELUS Edmonton Pension Plan
and claims damages in the sum of $15.5 million. On February 19, 2002, the
Company filed statements of defence to both actions and also filed notices of
motion for certain relief, including an order striking out the actions as
representative or class actions. On May 17, 2002, the statements of claim were
amended by the plaintiffs and include allegations, inter alia, that benefits
provided under the TELUS Corporation Pension Plan and the TELUS Edmonton
Pension Plan are less advantageous than the benefits provided under the
respective former pension plans, contrary to applicable legislation, that
insufficient contributions were made to the plans and contribution holidays
were taken and that the defendants wrongfully used the diverted funds, and
that administration fees and expenses were improperly deducted. The Company
filed statements of defence to the amended statements of claim on June 3,
2002. The Company believes that it has good defences to the actions. As a term
of the settlement reached between TELUS Communications Inc. and the
Telecommunications Workers Union that resulted in a collective agreement
effective November 20, 2005, the Telecommunications Workers Union has agreed
to not provide any direct or indirect financial or other assistance to the
plaintiffs in these actions, and to communicate to the plaintiffs the
Telecommunications Workers Union's desire and recommendation that these
proceedings be dismissed or discontinued. The Company has been advised by the
Telecommunications Workers Union that the plaintiffs have not agreed to
dismiss or discontinue these actions. Should the lawsuits continue because of
the actions of the court, the plaintiffs or for any other reason, and their
ultimate resolution differ from management's assessment and assumptions, a
material adjustment to the Company's financial position and the results of its
operations could result.
Uncertified class action: A class action was brought August 9, 2004, under
the Class Actions Act (Saskatchewan), against a number of past and present
wireless service providers including the Company. The claim alleges that each
of the carriers is in breach of contract and has violated competition, trade
practices and consumer protection legislation across Canada in connection with
the collection of system access fees, and seeks to recover direct and punitive
damages in an unspecified amount. Similar proceedings have also been filed by,
or on behalf of, plaintiffs' counsel in other provincial jurisdictions. On
July 18, 2006, the Saskatchewan court declined to certify the action as a
class action, but granted the plaintiffs leave to renew their application in
order to further address certain statutory requirements respecting class
actions. The Company believes that it has good defences to the action. Should
the ultimate resolution of this action differ from management's assessments
and assumptions, a material adjustment to the Company's financial position and
the results of its operations could result.
20 additional financial information
(a) Income statement
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Operations expense(1):
Cost of sales and service $ 2,742.0 $ 2,652.9
Selling, general and administrative 2,280.9 2,140.6
--------------------------------------------------------------------------------------------------------------------------------
$ 5,022.9 $ 4,793.5
================================================================================================================================
$ 276.6 $ 224.0
================================================================================================================================
(1) Cost of sales and service include cost of goods sold and costs to operate
and maintain access to and usage of the Company's telecommunications
infrastructure. Selling, general and administrative costs include sales and
marketing costs (including commissions), customer care, bad debt expense, real
estate costs and corporate overhead costs such as information technology,
finance (including billing services, credit and collection), legal, human
resources and external affairs.
Employee salaries, benefits and related costs are included in one of the two
components of operations expense to the extent that the costs are related to
the component functions.
(b) Balance sheet
As at December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Accounts receivable
Customer accounts receivable $ 545.6 $ 451.1
Accrued receivables -- customer 83.2 113.2
Allowance for doubtful accounts (54.8) (57.2)
--------------------------------------------------------------------------------------------------------------------------------
574.0 507.1
Accrued receivables -- other 125.4 94.3
Other 7.8 8.9
---------------------------------------------------------------------------------------------------------------------------------
$ 707.2 $ 610.3
=================================================================================================================================
Prepaid expense and other
Prepaid expenses $ 109.9 $ 87.7
Deferred customer activation and connection costs 33.0 66.4
Prepaid expense arising from early termination of cross
currency interest rate swap agreements (Note 17(b)) 10.3 --
Other 42.1 0.6
---------------------------------------------------------------------------------------------------------------------------------
$ 195.3 $ 154.7
=================================================================================================================================
Deferred charges
Recognized transitional pension assets and pension plan
contributions in excess of charges to income $ 826.2 $ 687.9
Deferred customer activation and connection costs 115.4 104.4
Cost of issuing debt securities, less amortization 19.9 23.5
Other 15.0 34.4
---------------------------------------------------------------------------------------------------------------------------------
$ 976.5 $ 850.2
=================================================================================================================================
Accounts payable and accrued liabilities
Accrued liabilities $ 449.7 $ 508.6
Payroll and other employee-related liabilities 383.8 388.7
Asset retirement obligations 4.1 4.1
---------------------------------------------------------------------------------------------------------------------------------
837.6 901.4
Trade accounts payable 427.3 394.4
Interest payable 47.7 54.8
Other 51.0 43.1
---------------------------------------------------------------------------------------------------------------------------------
$ 1,363.6 $ 1,393.7
=================================================================================================================================
Advance billings and customer deposits
Advance billings $ 351.6 $ 322.4
Regulatory deferral accounts (Note 19(a)) 164.8 158.7
Deferred customer activation and connection fees 69.5 66.4
Customer deposits 20.4 24.3
---------------------------------------------------------------------------------------------------------------------------------
$ 606.3 $ 571.8
=================================================================================================================================
Other long-term liabilities
Deferred hedging liability (Note 17(b)) $710.3 $ 1,154.3
Pension and other post-retirement liabilities 198.7 189.1
Other 128.2 77.5
---------------------------------------------------------------------------------------------------------------------------------
1,037.2 1,420.9
Deferred customer activation and connection fees 115.4 104.4
Deferred gain on sale-leaseback of buildings 71.6 81.1
Asset retirement obligations 33.1 28.9
---------------------------------------------------------------------------------------------------------------------------------
$ 1,257.3 $ 1,635.3
=================================================================================================================================
(c) Supplementary cash flow information
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Net change in non-cash working capital
Short-term investments $ (110.2) $ --
Accounts receivable (95.6) 262.7
Inventories (57.6) (5.5)
Prepaid expenses and other (27.4) 28.7
Accounts payable and accrued liabilities (27.2) (1.3)
Income and other taxes receivable and payable, net 35.8 28.8
Advance billings and customer deposits 34.5 40.3
---------------------------------------------------------------------------------------------------------------------------------
$ (247.7) $ 353.7
=================================================================================================================================
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Interest (paid)
Amount (paid) in respect of interest expense $ (484.9) $ (607.4)
Interest related portion of cross currency interest
rate swap agreement termination payments (Note 17(b)) (31.2) --
Amounts (paid) in respect of loss on redemption of long-term debt -- (30.9)
--------------------------------------------------------------------------------------------------------------------------------
$(516.1) $ (638.3)
=================================================================================================================================
21 differences between Canadian and United States generally accepted
accounting principles
The consolidated financial statements have been prepared in accordance with
Canadian GAAP. The principles adopted in these financial statements conform in
all material respects to those generally accepted in the United States except
as summarized below. Significant differences between Canadian GAAP and U.S.
GAAP would have the following effect on reported net income of the Company:
Years ended December 31 (millions except per share amounts) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
(as adjusted -- (b))
Net income in accordance with Canadian GAAP $ 1,122.5 $ 700.3
Adjustments:
Operating expenses
Operations (b) (16.9) ( 16.9)
Amortization of intangible assets (c) 50.7) (81.8)
Financing costs (e) -- 5.5
Accounting for derivatives (f) 6.0 4.1
Taxes on the above adjustments and tax rate changes (g) 76.6 36.1
--------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP 1,137.5 647.3
Other comprehensive income (loss), net of taxes (h)
Foreign currency translation adjustment 5.8 (5.1)
Change in unrealized fair value of derivatives designated as cash flow hedges 36.8 (79.5)
Change in pension related other comprehensive income accounts (106.1) (41.8)
--------------------------------------------------------------------------------------------------------------------------------
(63.5) (126.4)
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive income in accordance with U.S. GAAP $ 1,074.0 $ 520.9
================================================================================================================================
Net income in accordance with U.S. GAAP per Common Share and Non-Voting Share
- Basic $ 3.31 $ 1.81
- Diluted $ 3.27 $ 1.79
The following is an analysis of retained earnings (deficit) reflecting
the application of U.S. GAAP:
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
(as adjusted -- (b))
Schedule of retained earnings (deficit) under U.S. GAAP
Balance at beginning of period $ (785.5) $ (590.2)
Transitional amount for share-based compensation arising
from share option awards (b) -- (185.5)
--------------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance (785.5) (775.7)
Net income in accordance with U.S. GAAP 1,137.5 647.3
--------------------------------------------------------------------------------------------------------------------------------
352.0 (128.4)
Common Share and Non-Voting Share dividends paid, or payable, in cash (411.7) (312.2)
Purchase of Common Shares and Non-Voting Shares in excess of stated capital (361.9) (339.5)
Adjustment to purchase of share option awards not in excess of their fair value 2.1 (3.4)
Warrant proceeds used in determining intrinsic value of warrants in excess of
amounts ultimately received (Note 18(c)) -- (2.0)
--------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (419.5) $ (785.5)
================================================================================================================================
The following is an analysis of major balance sheet categories reflecting the
application of U.S. GAAP:
As at December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Current Assets $ 1,344.9 $ 1,242.5
Capital Assets
Property, plant, equipment and other 7,466.5 7,339.4
Intangible assets subject to amortization 2,156.2 2,295.2
Intangible assets with indefinite lives 2,966.4 2,964.6
Goodwill 3,572.0 3,575.5
Other Assets 675.7 736.3
---------------------------------------------------------------------------------------------------------------------------------
$18,181.7 $18,153.5
=================================================================================================================================
Current Liabilities $3,738.2 $2,027.5
Long-Term Debt 3,493.7 4,639.9
Other Long-Term Liabilities 1,550.0 2,024.9
Deferred Income Taxes 1,363.7 1,410.8
Non-Controlling Interest 23.6 25.6
Shareholders' Equity 8,012.5 8,024.8
---------------------------------------------------------------------------------------------------------------------------------
$18,181.7 $18,153.5
=================================================================================================================================
The following is a reconciliation of shareholders' equity incorporating the
differences between Canadian and U.S. GAAP:
Shareholders' Equity
--------------------------------------------------------------------------------------------------
Cumulative
As at foreign Accumulated
December 31, 2006 Retained currency other
(millions) Common Non-Voting Options and earnings translation comprehensive Contributed
Shares Shares warrants (deficit) adjustment income (loss) surplus Total
--------------------------------------------------------------------------------------------------------------------------------
Under Canadian GAAP $2,264.4 $3,420.8 $ 0.8 $1,080.1 $ (1.5) $ -- $ 163.5 $6,928.1
Adjustments:
Merger of BC TELECOM
and TELUS (a),(c),(d) 1,770.1 993.0 -- (1,368.3) -- -- -- 1,394.8
Share-based compensation (b) 10.6 63.3 -- (131.2) -- -- 57.3 --
Acquisition of Clearnet
Communications Inc.
Goodwill (d) -- 131.4 -- (7.9) -- -- -- 123.5
Convertible debentures -- (2.9) -- 4.1 -- -- (1.2) --
Accounting for derivatives (f) -- -- -- 3.7 -- -- -- 3.7
Accumulated other
comprehensive income
(loss) (h) -- -- -- -- 1.5 (439.1) -- (437.6)
--------------------------------------------------------------------------------------------------------------------------------
Under U.S. GAAP $4,045.1 $4,605.6 $ 0.8 $(419.5) $ -- $(439.1) $ 219.6 $8,012.5
=================================================================================================================================
Shareholders' Equity (as adjusted -- (b))
--------------------------------------------------------------------------------------------------
As at foreign Accumulated
December 31, 2005 Retained currency other
(millions) Common Non-Voting Options and earnings translation comprehensive Contributed
Shares(b) Shares(b) warrants (deficit)(b) adjustment income (loss) surplus(b) Total
--------------------------------------------------------------------------------------------------------------------------------
Under Canadian GAAP $2,311.6 $3,556.7 $ 5.9 $ 849.7 $ (7.3) $ -- $ 153.4 $6,870.0
Adjustments:
Merger of BC TELECOM and
TELUS (a), (c) -- (e) 1,824.8 1,069.0 -- (1,493.9) -- -- -- 1,399.9
Share-based compensation (b) 7.4 50.3 -- (137.2) -- -- 79.5 --
Acquisition of Clearnet
Communications Inc.
Goodwill (d) -- 131.4 -- (7.9) -- -- -- 123.5
Convertible debentures -- (2.9) -- 4.1 -- -- (1.2) --
Accounting for derivatives (f) -- -- -- (0.3) -- -- -- (0.3)
Accumulated other comprehensive
income (loss) (h) -- -- -- -- 7.3 (375.6) -- (368.3)
---------------------------------------------------------------------------------------------------------------------------------
Under U.S. GAAP $4,143.8 $4,804.5 $5.9 $ (785.5) $ -- $(375.6) $ 231.7 $8,024.8
=================================================================================================================================
(a) Merger of BC TELECOM and TELUS
The business combination between BC TELECOM and TELUS Corporation (renamed
TELUS Holdings Inc., which was wound up June 1, 2001) was accounted for using
the pooling of interests method under Canadian GAAP. Under Canadian GAAP, the
application of the pooling of interests method of accounting for the merger of
BC TELECOM and TELUS Holdings Inc. resulted in a restatement of prior periods
as if the two companies had always been combined. Under U.S. GAAP, the merger
is accounted for using the purchase method. Use of the purchase method results
in TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM for $4,662.4
million (including merger related costs of $51.9 million) effective January
31, 1999.
(b) Operating expenses -- Operations
Future employee benefits: Under U.S. GAAP, TELUS' future employee benefit
assets and obligations have been recorded at their fair values on acquisition.
Accounting for future employee benefits under Canadian GAAP changed to become
more consistent with U.S. GAAP effective January 1, 2000. Canadian GAAP
provides that the transitional balances can be accounted for prospectively.
Therefore, to conform to U.S. GAAP, the amortization of the transitional
amount needs to be removed from the future employee benefit expense.
Effective as of the end of the first year ending after December 15, 2006,
U.S.GAAP requires the full recognition of obligations associated with its
employee future benefit plans as prescribed by Financial Accounting Standards
Board Statement of Financial Accounting Standard No. 158, "Employers'
Accounting for Defined Benefit Pension and other Postretirement Plans".
Applying this standard, the funded status of the Company's plans is shown
gross on the consolidated balance sheets and the difference between the net
funded plan status and the net accrued benefit asset or liability is included
as a component of other comprehensive income. Retrospective application of
this standard is not permitted. The effect on the December 31, 2006, U.S. GAAP
statement of financial position is set out in the following table.
Excluding Incremental
effect of effect of
application of application of
December 31, 2006 (millions) SFAS 158 SFAS 158 As reported
---------------------------------------------------------------------------------------------------------------------------------
Current Assets $ 1,344.9 $ -- $ 1,344.9
Capital Assets
Property, plant, equipment and other 7,466.5 -- 7,466.5
Intangible assets subject to amortization 2,156.2 -- 2,156.2
Intangible assets with indefinite lives 2,966.4 -- 2,966.4
Goodwill 3,572.0 -- 3,572.0
Other Assets 1,020.0 (344.3) 675.7
---------------------------------------------------------------------------------------------------------------------------------
$ 18,526.0 $ (344.3) $ 18,181.7
=================================================================================================================================
Current Liabilities $ 3,738.2 $ -- $3,738.2
Long-Term Debt 3,493.7 -- 3,493.7
Other Long-Term Liabilities 1,499.0 51.0 1,550.0
Deferred Income Taxes 1,485.2 (121.5) 1,363.7
Non-Controlling Interest 23.6 -- 23.6
Shareholders' Equity 8,286.3 (273.8) 8,012.5
---------------------------------------------------------------------------------------------------------------------------------
$ 18,526.0 $ (344.3) $ 18,181.7
=================================================================================================================================
Share-based compensation: Effective January 1, 2004, Canadian GAAP required
the adoption of the fair value method of accounting for share-based
compensation for awards made after 2001. The Canadian GAAP disclosures for
share-based compensation awards are set out in Note 11.
Effective January 1, 2006, U.S. GAAP required the adoption of the fair value
method of accounting for share-based compensation for awards made after 1994.
Prior to the adoption of the fair value method of accounting, the intrinsic
value based method was used to account for share option awards granted to
employees. The Company has selected the modified-retrospective transition
method and such method results in share option award expense being recognized
in net income in accordance with U.S. GAAP in fiscal years prior to 2006. The
share option award expense that is recognized in fiscal years subsequent to
2005 is in respect of share option awards granted after 1994 and vesting in
fiscal periods subsequent to 2005.
As the Company has selected the modified-retrospective transition method, it
must disclose the impact on net income in accordance with U.S. GAAP, and net
income in accordance with U.S. GAAP per Common Share and Non-Voting Share, as
if the fair value based method of accounting for the share-based compensation
had been applied in the comparative period.
On a prospective basis, commencing January 1, 2006, this will result in
there no longer being a difference between Canadian GAAP and U.S. GAAP
share-based compensation expense recognized in the results of operations
arising from current share-based compensation awards accounted for as equity
instruments. As share option awards granted subsequent to 1994 and prior to
2002 are captured by U.S. GAAP, but are not captured by Canadian GAAP,
differences in shareholders' equity accounts arising from these awards will
continue.
The application of the modified-retrospective transition method had the
following effect on comparative net income amounts presented:
Year ended December 31, 2005 (millions except per share amounts)
--------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP
As previously reported $ 661.5
Deduct: Share-based compensation arising from share option awards
determined under fair value based method for all awards(1) (14.2)
--------------------------------------------------------------------------------------------------------------------------------
As currently reported $ 647.3
=================================================================================================================================
Net income in accordance with U.S. GAAP per Common Share and Non-Voting Share
Basic
As previously reported (using intrinsic value method) $ 1.85
As currently reported (using fair value method) $ 1.81
Diluted
As previously reported (using intrinsic value method) $ 1.83
As currently reported (using fair value method) $ 1.79
(1) The effect of the fair value method of accounting for share-based
compensation arising from share option awards on income before income taxes
and non-controlling interest and net income does not differ. Further, the fair
value method of accounting for share-based compensation arising from share
option awards does not affect cash flows from operating activities nor does it
affect cash flows from financing activities.
To reflect the fair value of share option awards granted subsequent to 1994,
and vesting prior to 2006, certain components of shareholders' equity,
reflecting the application of U.S. GAAP, as at December 31, 2005, have been
restated as follows:
Shareholders' Equity
Accumulated
Options Retained other
Common Non-Voting and earnings comprehensive Contributed
(millions) Shares Shares warrants (deficit) income surplus Total
--------------------------------------------------------------------------------------------------------------------------------
Cumulative transition adjustment
for share-based compensation
arising from share option awards
granted in fiscal years ending
December 31:
2002 and 2003 (total Canadian
GAAP transitional amounts) $ -- $ 0.4 $ -- $ (25.1) $ -- $ 24.7 $ --
2004 and 2005 -- 25.7 -- (33.3) -- 7.6 --
---------------------------------------------------------------------------------------------------------------------------------
Total Canadian GAAP amounts
recognized as at December 31,
2005 -- 26.1 -- (58.4) -- 32.3 --
Cumulative transition adjustment
for share-based compensation
(and associated effects) arising
from share option awards granted
in fiscal years ending December
31, 1995 through 2001, inclusive(1) 7.4 50.3 -- (137.2) -- 79.5 --
--------------------------------------------------------------------------------------------------------------------------------
Total U.S. GAAP transitional amounts 7.4 76.4 -- (195.6) -- 111.8 --
December 31, 2005, U.S. GAAP amounts,
as previously reported 4,136.4 4,728.1 5.9 (589.9) (375.6) 119.9 8,024.8
---------------------------------------------------------------------------------------------------------------------------------
January 1, 2006, U.S. GAAP amounts $4,143.8 $4,804.5 $ 5.9 $ (785.5) $(375.6) $ 231.7 $ 8,024.8
=================================================================================================================================
(1)As share option awards granted subsequent to 1994 and prior to 2002
are captured by U.S. GAAP, but are not captured by Canadian GAAP, differences
in shareholders' equity accounts arising from these awards will continue.
To reflect the fair value of share option awards granted subsequent to 1994,
and vesting prior to 2005, certain components of shareholders' equity,
reflecting the application of U.S. GAAP, as at December 31, 2004, have been
restated as follows:
Accumulated
Options Retained other
Common Non-Voting warrants earnings comprehensive Contributed
(millions) Shares Shares and other (deficit) income surplus Total
--------------------------------------------------------------------------------------------------------------------------------
Cumulative transition adjustment
for share-based compensation
arising from share option awards
granted in fiscal years ending
December 31:
2002 and 2003 (total Canadian
GAAP transitional amounts) $ -- $ 0.4 $ -- $ (25.1) $ -- $ 24.7 $ --
2004 -- 14.7 -- (19.1) -- 4.4 --
---------------------------------------------------------------------------------------------------------------------------------
Total Canadian GAAP amounts
recognized as at December 31,
2004 -- 15.1 -- (44.2) -- 29.1 --
Cumulative transition adjustment
for share-based compensation
(and associated effects) arising
from share option awards granted
in fiscal years ending December 31,
1995 through 2001, inclusive(1) 3.4 10.5 -- (141.3) -- 127.4 --
---------------------------------------------------------------------------------------------------------------------------------
Total U.S. GAAP transitional amounts 3.4 25.6 -- (185.5) -- 156.5 --
December 31, 2004, U.S. GAAP amounts,
as previously reported 4,341.0 4,700.8 27.7 (590.2) (249.2) 119.9 8,350.0
---------------------------------------------------------------------------------------------------------------------------------
January 1, 2005, U.S. GAAP amounts $4,344.4 $4,726.4 $ 27.7 $ (775.7) $(249.2) $ 276.4 $ 8,350.0
=================================================================================================================================
(1)As share option awards granted subsequent to 1994 and prior to 2002
are captured by U.S. GAAP, but are not captured by Canadian GAAP, differences
in shareholders' equity accounts arising from these awards will continue.
Subsequent to December 31, 2006, the Company amended substantially all of its
share option awards that were granted prior to January 1, 2005, and which were
outstanding on January 1, 2007, by adding a net-cash settlement feature; the
optionee has the choice of exercising the net-cash settlement feature. The
result of such amendment is that the affected outstanding share option awards
largely take on the characteristics of liability instruments rather than
equity instruments; the minimum expense recognized for the affected share
option awards will be their grant-date fair values. Under U.S. GAAP, the
grant-date fair values of affected outstanding share option awards granted
subsequent to 1994 affect the transitional amount whereas Canadian GAAP only
considers grant-date fair values for affected outstanding share option awards
granted subsequent to 2001.
The consolidated statement of income transitional effect (an expense increase)
of such amendment, reflecting the application of U.S. GAAP and vesting as at
December 31, 2006, and which is expected to be recorded in the first quarter
of 2007, is as follows:
($ in millions except per share amounts)
---------------------------------------------------------------------------------------------------------------------------------
Change in:
Operations expense(1) $ 126.1
Income taxes(2) -- future 60.6
---------------------------------------------------------------------------------------------------------------------------------
Net income and Common Share and Non-Voting Share income $ 65.5
=================================================================================================================================
Income per Common Share and Non-Voting Share(1)(2)
-- Basic $ 0.19
-- Diluted $ 0.19
(1) This transitional amount does not result in an immediate cash outflow. The
timing of the associated cash outflows is predicated upon when optionees
exercise their share option awards and upon them choosing to use the net-cash
settlement feature.
This transitional amount excludes the effects of vesting, forfeitures,
cancellations and expiries that may occur subsequent to December 31, 2006.
Further, it excludes the effects of any hedging agreements substantially
fixing the cost of the share option awards to the Company as well as any
changes in the prices of the Company's Common Shares and Non-Voting Shares.
(2) Income taxes -- future, and per share amounts, are based upon the
corresponding amounts used for the year ended December 31, 2006, calculations.
Had such amendment occurred immediately prior to January 1, 2007, certain line
items of the Company's December 31, 2006, Consolidated Balance Sheet,
reflecting the application of U.S. GAAP, would have been adjusted as follows
to reflect the transitional effect:
As at December 31, 2006 ($ in millions) Impact of amending
As currently outstanding share
reported option awards(1) Pro forma
---------------------------------------------------------------------------------------------------------------------------------
Current liabilities
Accounts payable and accrued liabilities
Accrued share option award liability $ -- $ 180.5 $ 180.5
Future income taxes $ 93.2 $ (60.6) $ 32.6
Shareholders' equity
Options, warrants and other $ 0.8 $ (0.8) $ --
Retained earnings $ (419.5) $ (65.5) $ (485.0)
Contributed surplus $ 219.6 $ (53.6) $ 166.0
(1) This transitional amount excludes the effects of vesting, forfeitures,
cancellations and expiries that may occur subsequent to December 31, 2006.
Further, it excludes the effects of any hedging agreements substantially
fixing the cost of the share option awards to the Company as well as any
changes in the prices of the Company's Common Shares and Non-Voting Shares.
(c) Operating expenses -- Amortization of intangible assets
As TELUS' intangible assets on acquisition have been recorded at their fair
value (see (a)), amortization of such assets, other than for those with
indefinite lives, needs to be included under U.S. GAAP; consistent with prior
years, amortization is calculated using the straight-line method.
The incremental amounts recorded as intangible assets arising from the TELUS
acquisition above are as follows:
Accumulated Net Book Value
Cost Amortization
--------------------------------------------------------------------------------------------------------------------------------
As at December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers -- wireline $ 1,950.0 $ 343.0 $ 1,607.0 $ 1,654.2
Subscribers -- wireless 250.0 250.0 -- 3.5
---------------------------------------------------------------------------------------------------------------------------------
2,200.0 593.0 1,607.0 1,657.7
--------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 1,833.3 1,833.3 -- --
---------------------------------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,426.3 $ 1,607.0 $ 1,657.7
=================================================================================================================================
(1) Accumulated amortization of spectrum licences is amortization recorded
prior to 2002 and the transitional impairment amount.
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at December 31, 2006, for
each of the next five fiscal years is as follows:
Years ending December 31 (millions)
--------------------------------------------------------------------------------------------------------------------------------
2007 $ 228.1
2008 139.8
2009 83.4
2010 63.0
2011 60.9
--------------------------------------------------------------------------------------------------------------------------------
(d) Goodwill
Merger of BC TELECOM and TELUS: Under the purchase method of accounting,
TELUS' assets and liabilities at acquisition (see (a)) have been recorded at
their fair values with the excess purchase price being allocated to goodwill
in the amount of $403.1 million. Commencing January 1, 2002, rather than being
systematically amortized, the carrying value of goodwill is periodically
tested for impairment.
Additional goodwill on Clearnet purchase: Under U.S. GAAP, shares issued by
the acquirer to effect an acquisition are measured at the date the acquisition
was announced; however, under Canadian GAAP, at the time the transaction took
place, shares issued to effect an acquisition were measured at the transaction
date. This results in the purchase price under U.S. GAAP being $131.4 million
higher than under Canadian GAAP. The resulting difference is assigned to
goodwill. Commencing January 1, 2002, rather than being systematically
amortized, the carrying value of goodwill is periodically tested for
impairment.
(e) Financing costs
Merger of BC TELECOM and TELUS: Under the purchase method, TELUS' long-term
debt on acquisition has been recorded at its fair value rather than at its
underlying cost (book value) to TELUS. Therefore, interest expense calculated
on the debt based on fair values at the date of acquisition under U.S. GAAP
will be different from TELUS' interest expense based on underlying cost (book
value). As of December 31, 2005, the amortization of this difference had been
completed.
(f) Accounting for derivatives
Under U.S. GAAP, all derivatives need to be recognized as either assets or
liabilities and measured at fair value. This is different from the Canadian
GAAP treatment for financial instruments as currently applied by the Company;
see Note 2(b). Under U.S. GAAP, derivatives which are fair value hedges,
together with the financial instrument being hedged, will be marked to market
with adjustments reflected in income and derivatives which are cash flow
hedges will be marked to market with adjustments reflected in comprehensive
income (see (h)).
(g) Income taxes
Years ended December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Current $ (58.2) $ (18.0)
Deferred 332.6 303.9
---------------------------------------------------------------------------------------------------------------------------------
274.4 285.9
Investment Tax Credits (18.5) (0.4)
--------------------------------------------------------------------------------------------------------------------------------
$255.9 $ 285.5
=================================================================================================================================
The Company's income tax expense (recovery), for U.S. GAAP purposes, differs
from that calculated by applying statutory rates for the following reasons:
Years ended December 31 ($ in millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 470.4 33.6% $ 321.8 34.2%
Revaluation of deferred income tax liability
for change in statutory income tax rates (162.9) (10.8)
Share option award compensation 6.4 4.9
Tax rate differential on, and consequential
adjustments from, reassessment of prior year
tax issues (40.3) (13.9)
Change in estimates of available deductible
differences in prior years -- (37.5)
Investment Tax Credits, net of tax (12.3) (0.3)
Other (5.4) 4.8
---------------------------------------------------------------------------------------------------------------------------------
255.9 18.3% 269.0 28.6%
Large corporations tax -- 16.5
---------------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 255.9 18.3% $ 285.5 30.4%
=================================================================================================================================
As referred to in Note 1(b), the Company must make significant estimates in
respect of the composition of its deferred income tax asset and deferred
income tax liability. The operations of the Company are complex, and related
tax interpretations, regulations and legislation are continually changing. As
a result, there are usually some tax matters in question. Temporary
differences comprising the deferred income tax asset (liability) are estimated
as follows:
As at December 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Capital assets
Property, plant, equipment, other and intangible assets subject to amortization $ (553.7) $ (578.0)
Intangible assets with indefinite lives (866.1) (974.4)
Working capital, excluding reserves (506.1) 2.8
Pension amounts (74.2) (93.0)
Losses available to be carried forward 315.4 164.0
Reserves not currently deductible 97.7 111.3
Other 130.1 182.9
---------------------------------------------------------------------------------------------------------------------------------
$ (1,456.9) $ (1,184.4)
=================================================================================================================================
Deferred income tax asset
Current $ -- $ 226.4
Deferred income tax liability
Current (93.2) --
Non-current (1,363.7) (1,410.8)
--------------------------------------------------------------------------------------------------------------------------------
(1,456.9) (1,410.8)
--------------------------------------------------------------------------------------------------------------------------------
Deferred income tax asset (liability) $ (1,456.9) $ (1,184.4)
=================================================================================================================================
(h) Additional disclosures required under U.S. GAAP -- Comprehensive income
U.S. GAAP requires that a statement of comprehensive income be displayed with
the same prominence as other financial statements. Comprehensive income, which
incorporates net income, includes all changes in equity during a period except
those resulting from investments by and distributions to owners. There is no
requirement to disclose comprehensive income under Canadian GAAP prior to
fiscal periods beginning on or after January 1, 2007.
Years ended December 31 (millions) 2006 2005
---------------------------------------------------------------------- ------------------------------------------------------
Cumulative Unrealized Cumulative Unrealized
foreign fair value of foreign fair value of
currency derivative Pension and currency derivative Minimum
translation cash flow other benefit translation cash flow pension
adjustment hedges plans(1) Total adjustment hedges liability Total
--------------------------------------------------------------------------------------------------------------------------------
Amount arising(2) $ 5.8 $ 57.4 $ (140.6) $ (77.4) $ (5.1) $ (119.1) $ (62.1) $ (186.3)
Income tax expense
(recovery) -- 20.6 (34.5) (13.9) -- (39.6) (20.3) (59.9)
---------------------------------------------------------------------------------------------------------------------------------
Net 5.8 36.8 (106.1) (63.5) (5.1) (79.5) (41.8) (126.4)
Accumulated other
comprehensive income
(loss), beginning of
period (7.3) (200.6) (167.7) (375.6) (2.2) (121.1) (125.9) (249.2)
---------------------------------------------------------------------------------------------------------------------------------
Accumulated other
comprehensive income
(loss), end of period $ (1.5) $(163.8) $ (273.8) $ (439.1) $ (7.3) $ (200.6) $(167.7) $ (375.6)
=================================================================================================================================
(1) With the introduction of SFAS 158 (see (b)), gains or losses associated
with pension or other postretirement benefits, prior service costs or credits
associated with pension or other postretirement benefits, transition assets or
obligations associated with pension or other postretirement benefits are to be
presented as a separate component of other comprehensive income. The income
tax provision reflects the reversal of the minimum pension liability at a rate
of 34.2% and the set up the new pension items at a rate of 30.7%.
(2) The amount arising for Pension and other benefit plans for the year ended
December 31, 2006, includes an adjustment to reflect that the concept of
minimum pension liability is no longer recognized as a component of other
comprehensive income.
The closing accumulated other comprehensive income amounts in respect of
components of net periodic benefit costs not yet recognized, and the amounts
expected to be recognized in fiscal 2007, are as follows:
Accumulated other comprehensive income amounts
------------------------------------------------- Amounts
expected to be
Gross (see recognized in
As at December 31, 2006 (millions) Note 12(a)) Tax effect Net fiscal 2007
---------------------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Unamortized net actuarial loss (gain) $ 812.5 $ 249.8 $ 562.7 $ 11.0
Unamortized past service costs 5.3 1.6 3.7 0.7
Unamortized transitional obligation (asset) (412.1) (126.7) (285.4) (20.1)
---------------------------------------------------------------------------------------------------------------------------------
405.7 124.7 281.0 (8.4)
---------------------------------------------------------------------------------------------------------------------------------
Other benefit plans
Unamortized net actuarial loss (gain) (12.8) (3.9) (8.9) (2.4)
Unamortized transitional obligation (asset) 2.4 0.7 1.7 0.8
---------------------------------------------------------------------------------------------------------------------------------
(10.4) (3.2) (7.2) (1.6)
---------------------------------------------------------------------------------------------------------------------------------
$ 395.3 $ 121.5 $ 273.8 $ (10.0)
=================================================================================================================================
(i) Recently issued accounting standards not yet implemented
Uncertain income tax positions: Under U.S. GAAP, effective for its 2007 fiscal
year, the Company is expected to be required to comply with accounting for
uncertain income tax positions, as prescribed by Financial Accounting
Standards Board Financial Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes". The Company has assessed the cumulative impact of adopting
this new standard as of January 1, 2007. Based upon this review, the Company
does not expect the adoption of this Interpretation will have a material
impact on its consolidated financial statements.
Single definition of "fair value". Under U.S. GAAP, effective for its 2008
fiscal year, the Company is expected to be required to comply with a unified
approach to fair value measurement of assets and liabilities, as prescribed by
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements". The Company is assessing the
provisions of this statement.
Other: As would affect the Company, there are no other U.S. accounting
standards currently issued and not yet implemented that would differ from
Canadian accounting standards currently issued and not yet implemented.
Forward-looking statements
______________________________________________________________________________
This report and Management's discussion and analysis contain statements about
expected future events and financial and operating results of TELUS
Corporation (TELUS or the Company) that are forward-looking. By their nature,
forward-looking statements require the Company to make assumptions and are
subject to inherent risks and uncertainties. There is significant risk that
predictions, assumptions (see below) and other forward-looking statements will
not prove to be accurate. Readers are cautioned not to place undue reliance on
forward-looking statements as a number of factors could cause actual future
results, conditions, actions or events to differ materially from financial and
operating targets, expectations, estimates or intentions expressed in the
forward-looking statements.
Assumptions for 2007 targets include: economic growth consistent with recent
provincial and national estimates by the Conference Board of Canada, including
2007 real GDP (gross domestic product) growth of 2.7% in Canada; increased
wireline competition in both business and consumer markets, particularly from
cable-TV and voice over Internet protocol (VoIP) companies; forbearance for
local retail wireline services in major urban incumbent markets by the second
half of 2007; no further price cap mandated consumer price reductions; a
wireless industry market penetration gain of 4.5 to five percentage points;
approximately $50 million restructuring and workforce reduction expenses;
statutory tax rate of 33 to 34%; a discount rate of 5.0% and an expected
long-term average return of 7.25% for pension accounting, unchanged from 2006;
and average shares outstanding of 330 to 335 million. Earnings per share
(EPS), cash balances, net debt and common equity may be affected by the
potential purchases of up to 24 million TELUS shares over a 12-month period
under the normal course issuer bid that commenced December 20, 2006.
Factors that could cause actual results to differ materially include but are
not limited to: competition; economic growth and fluctuations (including
pension performance, funding and expenses); capital expenditure levels
(including possible spectrum asset purchases); financing and debt requirements
(including share repurchases, debt redemptions, potential issuance of
commercial paper and changes to credit facilities); tax matters (including
acceleration or deferral of required payments of significant amounts of cash
taxes); human resource developments (including possible labour disruptions);
technology (including reliance on systems and information technology);
regulatory developments (including local forbearance, local price cap
reductions, wireless number portability and the timing, rules, process and
cost of future spectrum auctions); process risks (including internal
reorganizations, conversion of legacy systems and billing system
integrations); health, safety and environmental developments; litigation and
legal matters; business continuity events (including manmade and natural
threats); and other risk factors discussed herein and listed from time to time
in TELUS' reports and public disclosure documents, including annual reports,
and in other filings with securities commissions in Canada (filed on SEDAR at
www.sedar.com) and the United States (filed on EDGAR at www.sec.gov).
For further information, see Section 10: Risks and risk management of
Management's discussion and analysis.
______________________________________________________________________________
Management's discussion and analysis
February 14, 2007
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the years ended
December 31, 2006 and 2005, and should be read together with TELUS'
Consolidated financial statements. This discussion contains forward-looking
information that is qualified by reference to, and should be read together
with, the discussion regarding forward-looking statements above.
TELUS' Consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles (GAAP), which differ in
certain respects from U.S. GAAP. See Note 21 to the Consolidated financial
statements for a summary of the principal differences between Canadian and
U.S. GAAP as they relate to TELUS. The Consolidated financial statements and
Management's discussion and analysis were reviewed by TELUS' Audit Committee
and approved by TELUS' Board of Directors. All amounts are in Canadian dollars
unless otherwise specified.
The Company has issued guidance on and reports on certain non-GAAP measures
that are used by management to evaluate performance of business units,
segments and the Company. In addition, non-GAAP measures are used in measuring
compliance with debt covenants and are used to manage the capital structure.
Because non-GAAP measures do not have a standardized meaning, securities
regulations require that non-GAAP measures be clearly defined and qualified,
and reconciled with their nearest GAAP measure. For the readers' reference,
the definition, calculation and reconciliation of consolidated non-GAAP
measures is provided in Section 11: Reconciliation of non-GAAP measures and
definition of key operating indicators.
Management's discussion and analysis contents
Section Contents
--------------------------------------------------------------------------------------------------------------------------------
1.Introduction and performance summary A summary of consolidated results and a description of performance against annual
targets set for 2006
--------------------------------------------------------------------------------------------------------------------------------
2.Core business, vision and strategy A discussion of TELUS' core business, vision and strategy, including examples of
TELUS' activities in support of its six strategic imperatives
--------------------------------------------------------------------------------------------------------------------------------
3.Key performance drivers Corporate priorities in place for 2006 and planned for 2007
--------------------------------------------------------------------------------------------------------------------------------
4.Capability to deliver results A description of the factors that affect the capability to execute strategies,
manage key performance drivers and deliver results
--------------------------------------------------------------------------------------------------------------------------------
5.Results from operations A detailed discussion of operating results for 2006
--------------------------------------------------------------------------------------------------------------------------------
6.Financial condition A discussion of significant changes in the balance sheet at December 31, 2006,
as compared to December 31, 2005
--------------------------------------------------------------------------------------------------------------------------------
7.Liquidity and capital resources A discussion of cash flow, liquidity, credit facilities, off-balance sheet
arrangements and other disclosures
--------------------------------------------------------------------------------------------------------------------------------
8.Critical accounting estimates and A description of accounting estimates, which are critical to determining financial
accounting policy developments results, and changes to accounting policies
--------------------------------------------------------------------------------------------------------------------------------
9.Looking forward to 2007 A discussion of the outlook for 2007 and TELUS' 2007 financial and operational
targets, including key assumptions and financing plans
--------------------------------------------------------------------------------------------------------------------------------
10.Risks and risk management Risks and uncertainties facing TELUS and how the Company manages these risks
--------------------------------------------------------------------------------------------------------------------------------
11.Reconciliation of non-GAAP measures A description, calculation and reconciliation of certain measures used by
and definition of key operating management
indicators
--------------------------------------------------------------------------------------------------------------------------------
1. Introduction and performance summary
1.1 Materiality for disclosures
Management determines whether or not information is material based on whether
it believes a reasonable investor's decision to buy, sell or hold securities
in the Company would likely be influenced or changed if the information were
omitted or misstated.
1.2 Proposed reorganization as an income trust
On November 24, 2006, the Company announced that it had re-evaluated its
proposal announced on September 11, 2006 to reorganize in its entirety into an
income trust. TELUS management and the Board of Directors believe it is no
longer in the best interests of the Company and its shareholders to proceed
with the reorganization. This decision is in light of the federal Minister of
Finance's announcement on October 31, 2006 of a new tax fairness plan that
would increase the taxation of income trusts.
1.3 Canadian telecommunications market
Canadian real GDP growth was recently estimated at 2.7% in 2006 by the
Conference Board of Canada. Canadian wireless industry revenues grew by an
estimated 16% as market penetration for the industry increased by
approximately 4.6 percentage points to 56% of the population. TELUS' wireless
segment achieved 17% revenue growth and 12% subscriber growth in 2006.
The Canadian wireline industry continued to face pressures in 2006 in the form
of expanding voice over Internet protocol (VoIP) offers by cable-TV
competitors and others, as well as continued technological substitution of
voice services to wireless, which contributed to losses of residential access
lines by incumbent telephone companies. TELUS' external wireline segment
revenues decreased by 0.5% in 2006 as growth in data services nearly offset
losses in voice services. TELUS' residential access lines decreased 5% in
2006, while TELUS' total access lines decreased 3% due to modest growth in
business lines.
While the Company's major cable-TV competitors and others expand their VoIP
telephony offers in the Company's incumbent territories, TELUS continues a
limited commercial launch of TELUS TV(R) services to select neighbourhoods in
its incumbent territories. The business market continues to adopt Internet
protocol (IP) and managed services as a means of achieving operational
efficiencies and improving revenue generation. Technology also continues to
evolve, both increasing the Company's opportunities and facilitating increased
competition. See Risks and risk management - Section 10.1 Competition and
Section 10.2 Technology for a complete discussion of these matters.
In addition, the regulatory environment is undergoing change. The federal
government undertook a review of Canada's telecommunications policy and
regulatory framework in 2005 and the review panel released its
Telecommunications Policy Review report of recommendations to the Minister of
Industry in March 2006. Some of the key points of this report were: there
should be an end to the presumption that telecom services must be regulated
and a shift to reliance on market forces, and where regulation remains, it
should be light-handed and flexible and must be justified in all
circumstances. The federal government directed the Canadian Radio-television
and Telecommunications Commission (CRTC) to make specific changes to the
regulation of incumbent telephone companies, of which some took effect in 2006
and some are expected to take effect in 2007. See Risks and risk management -
Section 10.3 Regulatory.
1.4 Consolidated highlights
($ millions, except shares, per share Years ended December 31
amounts, subscribers and ratios) 2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
Consolidated statements of income
--------------------------------------------------------------------------------------------------------------------------------
Operating revenues 8,681.0 8,142.7 6.6 %
Operating income 2,014.7 1,671.6 20.5 %
Income before income taxes and non-controlling interest 1,482.0 1,030.1 43.9 %
Net income 1,122.5 700.3 60.3 %
Earnings per share, basic ($) 3.27 1.96 66.8 %
Earnings per share, diluted ($) 3.23 1.94 66.5 %
Cash dividends declared per share ($) 1.20 0.875 37.1 %
--------------------------------------------------------------------------------------------------------------------------------
Consolidated statements of cash flows
--------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 2,803.7 2,914.6 (3.8)%
Cash used by investing activities 1,675.2 1,355.2 23.6 %
Capital expenditures 1,618.4 1,319.0 22.7 %
Cash used by financing activities 1,148.6 2,447.3 (53.1)%
--------------------------------------------------------------------------------------------------------------------------------
Subscribers and other measures
--------------------------------------------------------------------------------------------------------------------------------
Subscriber connections(1) (thousands) at Dec. 31 10,715 10,211 4.9 %
EBITDA (2) 3,590.3 3,295.3 9.0 %
Free cash flow (3) 1,600.4 1,465.5 9.2 %
--------------------------------------------------------------------------------------------------------------------------------
Debt and payout ratios
--------------------------------------------------------------------------------------------------------------------------------
Net debt to total capitalization ratio (%) (4) 47.5 47.7 (0.2) pts
Net debt to EBITDA ratio (5) 1.7 1.9 (0.2)
Dividend payout ratio (%)(6) 46 56 (10) pts
--------------------------------------------------------------------------------------------------------------------------------
pts- percentage point(s)
(1) The sum of wireless subscribers, network access lines and Internet subscribers measured
at the end of the respective periods.
(2) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before interest, taxes,
depreciation and amortization (EBITDA).
(3) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash flow.
(4) See Section 11.4 Definition of liquidity and capital resource measures.
(5) Net debt to EBITDA, where EBITDA excludes restructuring. See Section 11.4 Definition
of liquidity and capital resource measures.
(6) The current annualized rate of dividend declared per share multiplied by four and
divided by basic earnings per share for the 12-month trailing period.
Highlights, as discussed in Section 5: Results from operations, include the
following (comparing results for 2006 to 2005):
* The Company met or exceeded four of its five consolidated targets, and
met or exceeded seven of the ten segmented targets for 2006. See Section
1.5 Performance scorecard for 2006 results.
* Subscriber connections increased by 504,000 in the year ended
December 31, 2006, as the number of wireless subscribers grew by 11.8% to
5.06 million, the number of Internet subscribers grew by 11.2% to
1.11 million and the number of network access lines decreased by 3.0% to
4.55 million.
* Operating revenues increased due primarily to growth in wireless and data
revenues, which made up approximately 63% of consolidated revenues in 2006,
compared to 59% in 2005.
* Operating income increased mainly because of growth in wireless
subscribers and average revenue per subscriber unit per month (ARPU) as
well as the absence in 2006 of expenses related to the labour disruption.
In addition, the amortization of intangible assets decreased as several
software assets are fully amortized and certain investment tax credits were
recognized following a determination of eligibility by a revenue authority.
* Net income and earnings per share increased due to improved operating
performance, described above, as well as lower financing costs. The average
numbers of shares outstanding in 2006 were approximately 4% lower than 2005
due to share repurchase programs, which contributed to increased 2006
earnings per share. Favourable impacts of tax-related adjustments,
including changes in statutory tax rates affecting future income tax
liabilities, were approximately $165 million or 48 cents per share,
compared with approximately $70 million or 20 cents per share in 2005.
Highlights, as discussed in Section 7: Liquidity and capital resources, include
the following (comparing results for 2006 to 2005):
* Cash provided by operating activities decreased primarily due to
proceeds from securitized accounts receivable being unchanged in 2006,
compared with an increase of $350 million in 2005.
* Cash used by investing activities increased primarily due to greater
capital expenditures for investments in the broadband networks in B.C.,
Alberta and Quebec, network access growth to serve strong housing growth
in B.C. and Alberta, TELUS TV, strategic investments in EVDO-capable
higher-speed wireless network technology and continued enhancement of
digital wireless capacity and coverage. To a lesser extent, there was a
deferral of activity from 2005 to 2006 due to the 2005 labour disruption.
* Cash used by financing activities decreased due mainly to the early
redemption of $1.578 billion of Canadian dollar Notes on December 1, 2005.
* Free cash flow increased primarily due to higher EBITDA and lower
interest paid, which were partly offset by higher capital expenditures.
* Net debt to total capitalization at December 31, 2006 continued to be in
the target range of 45 to 50%.
* Net debt to EBITDA continued to be in the target range of 1.5 to 2.0
times.
* The dividend payout ratio for 2006, measured as the annualized dividend
declared in the fourth quarter divided by 2006 earnings per share, was
near the low end of the target guideline of 45 to 55% for sustainable net
earnings due mainly to the inclusion in actual earnings of positive
impacts from 2006 tax-related adjustments.
1.5 Performance scorecard for 2006 results
Eleven of 15 original targets for 2006 were met or exceeded. The following
items were not met:
* Consolidated capital expenditures and wireline capital expenditures
exceeded target ranges as a result of access growth requirements in
Alberta and B.C. and other factors;
* Wireline external revenue was just under the bottom of the target range;
and
* The number of wireless subscribers was approximately 3% lower than
TELUS' original target for 2006 as a result of market growth being slower
than originally expected, as discussed further below. By retaining focus
on profitable subscriber growth and retention activity, the lifetime
revenue per average subscriber increased by $346 to $4,771 in 2006, when
compared with 2005. Churn rates remained low, while postpaid subscriber
net additions in 2006 were 77% of the total net subscriber additions,
comparing favourably to 73% in 2005.
The following table summarizes TELUS' 2006 performance against its original
targets and compares 2007 targets to 2006 results. For further detail on
expectations for 2007, see Section 9: Looking forward to 2007.
--------------------------------------------------------------------------------------------------------------------------------
Performance to 2006 targets 2006 Original targets Targets Change
and 2007 targets results for 2006 Result for 2007 from 2006
--------------------------------------------------------------------------------------------------------------------------------
++ Exceeded target range
+ Met target
X Missed target
--------------------------------------------------------------------------------------------------------------------------------
Consolidated
Revenues $8.681 billion $8.6 to + $9.175 to 6 to 7%
$8.7 billion $9.275 billion
EBITDA (1) excluding charge for $3.590 billion $3.5 to + $3.725 to 4 to 7%
cash settlement feature for $3.6 billion $3.825 billion
vested options in 2007 (2)
Earnings per share (EPS) - basic $3.27 $2.40 to $2.60 ++ No target --
EPS excluding after-tax charge -- -- -- $3.25 to $3.45 (1) to 6%
for cash settlement of options
in 2007 (3)
Capital expenditures $1.618 billion $1.5 to
$1.55 billion X Approx.
$1.75 billion 8%
Free cash flow (4) $1.600 billion $1.55 to
$1.65 billion + No target --
--------------------------------------------------------------------------------------------------------------------------------
Wireline segment
Revenue (external) $4.823 billion $4.825 to X $4.85 to 1 to 2%
$4.875 billion $4.9 billion
Non-ILEC(5) revenue $657 million $650 to + No target --
$700 million
EBITDA excluding charge for cash $1.839 billion $1.8 to + $1.775 to (3) to (1)%
settlement of vested options in $1.85 billion $1.825 billion
2007 (2)
Non-ILEC EBITDA $32 million $25 to $40 + No target --
million
Capital expenditures $1.191 billion $1.05 to X Approx. Unchanged
$1.1 billion $1.2 billion
High-speed Internet subscriber 153,700 More than ++ More than (12) % or
net additions 100,000 135,000 better
--------------------------------------------------------------------------------------------------------------------------------
Wireless segment
Revenue (external) $3.858 billion $3.775 to ++ $4.325 to 12 to 13%
$3.825 billion $4.375 billion
EBITDA excluding charge for cash $1.751 billion $1.7 to ++ $1.95 to 11 to 14%
settlement of vested options in $1.75 billion $2.0 billion
2007 (2)
Capital expenditures $427 million Approx. ++ Approx. 29%
$450 million $550 million
Wireless subscriber net additions 535,200 More than X More than 3% or more
550,000 550,000
--------------------------------------------------------------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest, taxes, depreciation and amortization
(EBITDA).
(2) Excluding an expense of $150 to $200 million in 2007 for a change to add a cash
settlement choice for vested option, of which, $120 to $150 million is in wireline
and $30 to $50 million is in wireless.
(3) Excluding $0.30 to $0.40 for cash settlement of options in 2007.
(4) See Section 11.2 Free cash flow.
(5) Non-incumbent local exchange carrier.
--------------------------------------------------------------------------------------------------------------------------------
The following key assumptions were made at the time the original targets for
2006 were announced on December 16, 2005.
--------------------------------------------------------------------------------------------------------------------------------
Key assumption for 2006 targets Actual result and impact on results
--------------------------------------------------------------------------------------------------------------------------------
Canadian real GDP growth of 3.1% 2.7% (estimate). Canadian real GDP growth was lower than originally
expected, although recent estimates showed very high growth rates in
Alberta and B.C. The modestly lower national growth rate did not affect
results significantly.
Increased wireline competition in both Confirmed. Examples of increased competition in the business market
business and consumer markets include bundling of web-based and information technology services with
access, wireless and other data services. Increased competition in the
consumer market with cable-TV phone sales was one factor in the 5.2%
decrease in residential access lines in 2006.
Canadian wireless industry market penetration Estimated at 4.6 percentage points. Market growth was at the low end
gain would be approximately five percentage points of expectations and contributed to achieving 3% fewer net additions of
wireless subscribers than original targets.
TELUS would record approximately $100 million of $67.8 million. A lower charge was recorded primarily as a result of
restructuring and workforce reduction charges the restructuring initiatives being implemented more efficiently than
expected with a greater number of staff being redeployed to growth
areas of the business and therefore not requiring severance costs.
An effective income tax rate of approximately 35% Approximately 24%. The tax rate was reduced by the revaluation of the
future tax liability from the enactment of lower federal and provincial
tax rates, elimination of the federal large corporations tax and
reassessments relating to prior years.
No prospective significant acquisitions or Confirmed.
divestitures and no change in foreign ownership rules
Maintenance or improvement in credit ratings Confirmed. Moody's Investors Service placed its Baa2 rating for TELUS
under review for possible upgrade.
--------------------------------------------------------------------------------------------------------------------------------
TELUS consolidated results and 2007 targets. See Forward-looking statements at
the beginning of Management's discussion and analysis.
[graphs - Consolidated revenue; Consolidated EBITDA]
[graphs - Consolidated capital expenditures; Earnings per share]
1.6 TELUS segments at a glance
The Company has two reportable segments: wireline and wireless. Segmentation
is based on similarities in technology, the technical expertise required to
deliver the products and services, the distribution channels used and
regulatory treatment. Intersegment sales are recorded at the exchange value.
Segmented information is regularly reported to the Company's Chief Executive
Officer (the chief operating decision-maker). Segmented disclosure is reported
in Note 6 of the Consolidated financial statements. The following is a summary
of key actual and target metrics for the two segments.
TELUS wireline segment
Offers the following solutions: voice (local, long distance, call management
and the sale, rental and maintenance of telephone equipment), Internet
(high-speed or dial-up with security features); TELUS TV available in select
neighbourhoods with Video on Demand and Pay Per View; data (IP networks,
private line, switched services, network wholesale, network management and
hosting); converged voice and data solutions (TELUS IP-One Innovation and
TELUS IP-One Evolution(R)); hosting and infrastructure (managed IT and
infrastructure solutions delivered through TELUS' IP networks connected to
TELUS' Internet Data Centres); security solutions (managed and non-managed
solutions to protect business networks, messaging and data, in addition to
security consulting services);and customized solutions such as contact centre
services including Call Centre Anywhere(TM), conferencing services
(webcasting, audio, web and video) and human resource and health and safety
outsourcing solutions.
Wireline segment 2007 targets. See Forward looking statements at the beginning
of Management's discussion and analysis.
[graphs - wireline external revenue; wireline EBITDA]
[graphs - wireline capital expenditures; net additions of high-speed
Internet subscribers]
TELUS wireless segment
Offers the following solutions: digital voice services (PCS postpaid, PCS Pay
& Talk(R) prepaid, Mike(R) all-in-one (iDEN) and Push To Talk(TM)
capability on both Mike (Direct Connect(R)) and PCS (Instant Talk(R)));
Internet (TELUS Spark(TM) including wireless web, text, picture and video
messaging, music, ringtones, image and game downloads, TELUS Mobile Music(R),
TELUS Mobile Radio(TM) and TELUS Mobile TV(TM), and Wi-Fi Hotspots); and data
- devices including PC cards and personal digital assistants (PDAs) available
for use on wireless high-speed (EVDO), 1X and Mike packet data networks.
Wireless segment 2007 targets. See Forward looking statements at the beginning
of Management's discussion and analysis.
[graphs - wireless external revenue; wireless EBITDA]
[graphs - wireless capital expenditures; net additions of wireless
subscribers]
2. Core business, vision and strategy
The following discussion is qualified in its entirety by the Forward-looking
statements at the beginning of Management's discussion and analysis, and
Section 10: Risks and risk management.
2.1 Core business
TELUS Corporation is one of Canada's largest telecommunications companies,
providing a full range of telecommunications products and services. The
Company is the largest incumbent telecommunications provider in Western Canada
and also provides data, IP, voice and wireless services to Central and Eastern
Canada. TELUS earns the majority of its revenue from access to, and the use
of, the Company's national telecommunications infrastructure, or from
providing products and services that facilitate access to and usage of this
infrastructure.
At December 31, 2006, the Company's principal subsidiary is wholly owned TELUS
Communications Inc. (TCI).
2.2 Vision and strategy
TELUS' strategic intent, or vision, is to unleash the power of the Internet to
deliver the best solutions to Canadians at home, in the workplace and on the
move. TELUS' strategy for growth is to focus on its core telecommunications
business in Canada.
TELUS continues to be guided by its six long-standing strategic imperatives
that guide the Company's actions, which generate the financial results of
the Company. Activities during 2006 that supported the Company's six strategic
imperatives include the following:
Building national capabilities across data, IP, voice and wireless
With a focus on key vertical market segments (energy sector, financial
services, public sector and the healthcare industry), TELUS offers
differentiated applications to win new business contracts. For example, in the
healthcare sector, Ontario's Saint Elizabeth Health Care has contracted TELUS
to deploy its IP network to deliver hosting, voice and data communications
services. The Peterborough Regional Health Centre became the first to deploy
TELUS' unique Integrated Bedside Terminal solution with an order for 500
units. The bedside terminals provide patients and their caregivers with
clinical information, communication and entertainment on one interactive
screen. TELUS also launched Wireless Physician, an all-in-one wireless medical
database held in wireless devices that provides healthcare professionals with
up-to-date drug and diagnostic information in the palm of their hand to save
time and reduce errors.
In the public sector, TELUS was selected by the Ontario Ministry of Government
Services to provide, manage and supply its portfolio of network services
including information technology security for the entire government network.
The five-year contract is expected to generate approximately $140 million of
revenue. TELUS' network solution for the Government of Ontario is based on an
IP platform that provides secure transmission and electronic sharing of
information, and includes videoconferencing and web conferencing services.
Indicative of TELUS' growing presence in Central Canada is the increase in
team members from just over 300 people in early 2000 to almost 10,000 in
Ontario and Quebec at the end of 2006.
Focusing relentlessly on the growth markets of data, IP and wireless
TELUS expanded the availability of its wireless high-speed service to
two-thirds of the Canadian population in 2006. Wireless high-speed services
have typical download speeds of 400 to 700 kilobits per second, based on the
CDMA 1xEVDO standard, the newest third generation (3G) wireless data
technology available. TELUS also offers a variety of wireless high-speed PCS
phones and data devices, providing customers with the ability to use them on
TELUS' national 1X data network (which covers 92% of the Canadian population).
In December 2006, wireless high-speed roaming was extended to 230 U.S. cities.
TELUS introduced SPARK, a new name for its portfolio of mobile entertainment,
information and messaging services for consumers, and launched TELUS Mobile
Music and TELUS Mobile Radio. The SPARK portfolio also includes TELUS Mobile
TV, multimedia messaging, downloadable images, ringtones, videos and games,
and new web browser features, including search tools and a broad range of new
online content.
TELUS continued its targeted launch of TELUS TV service in selected
neighbourhoods in B.C., and Alberta. Employee trials of TELUS
TV began in Quebec. In addition, TELUS constructed a "head end" facility in
B.C. to gather TV signals from dozens of satellites for transmission to
customers in B.C. and Alberta. This new facility and the existing one in
Edmonton both serve customers in the two provinces and provide back-up
capability to each other in the event of an outage.
Building integrated solutions that differentiate TELUS from its competitors
TELUS announced in September 2006 that it intends to invest $600 million
between 2007 and 2009 to enhance its broadband infrastructure. This investment
will enable emerging high-speed Internet services and expand network coverage
across British Columbia, Alberta and Eastern Quebec.
TELUS' broadband project is an important investment, paving the way for
additional gains in the competitive high-speed Internet market and emerging
services including high-definition TELUS TV. The Company is installing
advanced Internet equipment in more than 7,000 sites across its network and
running fibre optic cable closer to customers' homes. Bringing fibre closer to
homes is expected to provide Internet access speeds of 15 to 30 megabits per
second and beyond.
The broadband project complements a rural capital investment program to bring
high-speed Internet services to more than 450 additional remote communities in
British Columbia, Alberta, and Eastern Quebec by 2010. Certain of these
initiatives are eligible to be recognized for deferral account treatment. See
the related discussion in Section 7.8 Commitments and contingent liabilities -
Price cap deferral accounts.
Partnering, acquiring and divesting to accelerate the implementation of
TELUS' strategy and focus TELUS' resources on core business
Under a previously announced agreement with the Government of B.C., TELUS has
completed construction of fibre to distribution points in 113 remote
communities in British Columbia, which enables future provision of high-speed
Internet service to these communities by regional or community-based Internet
service providers. An additional five communities specified in the agreement
are expected to be connected in early 2007.
In August 2006, TELUS and Amp'd Mobile, Inc. announced an exclusive
relationship for the sale and distribution of Amp'd branded services in
Canada. As a result, Amp'd Mobile's highly interactive and customized mobile
entertainment, information and messaging services are currently expected to be
offered in Canada operating on TELUS' wireless high-speed network in the
second quarter of 2007. Under the terms of the Licensing and Services
Agreement, Amp'd Mobile will be responsible for bringing unique entertainment
content to TELUS' subscribers as well as providing optimized handsets capable
of fast download speeds. TELUS will manage sales and distribution, billing,
client care, network operations and pricing. TELUS will have the exclusive
right to use Amp'd trademarks, premium data services, handsets and content
delivery platforms in Canada. This represents an opportunity for TELUS to more
effectively reach the high-value young adult (18 to 35) market with Amp'd
Mobile's highly differentiated, premium data and content-centric services.
TELUS Ventures, the strategic venture investment division of TELUS, also made
a U.S. $7.5 million equity investment in Amp'd Mobile, Inc., which is
headquartered in California.
Going to the market as one team under a common brand, executing a single
strategy
TELUS continues to make progress toward merging into a single
customer-oriented organization that is focused on being one team and defined
by one national brand. The TELUS logo replaced the logos of TELUS Mobility(R),
TELUS Quebec(R), TELUS Partner Solutions and TELUS Business Solutions where
they appeared in the marketplace and internally across the Company. The
adoption of one TELUS logo reinforces the strength of the TELUS brand and
advances the Company's corporate brand strategy as it pertains to an
integrated and differentiated approach in the marketplace.
Investing in internal capabilities to build a high-performance culture and
efficient operations
As the Company implemented the new collective agreement signed in late 2005,
it began to realize the benefits - aligning systems and processes, integrating
business units, and focusing on its core business. TELUS' operating efficiency
initiatives fall into three broad categories: outsourcing of non-core or
peak-load work; consolidation of offices and call centres; and process
improvement and automation.
With respect to outsourcing, TELUS has fully or partially contracted out a
number of non-core functions including property management, custodial
services, building maintenance, mail services, fleet maintenance, and pay
phone coin counting. As a result of these outsourcing initiatives,
approximately 250 employees have accepted either an offer of redeployment or a
voluntary departure package.
With respect to office consolidation, to achieve greater efficiency and
improve customer service, management has rationalized a number of offices into
larger centres, including the consolidation of the retail office and call
centre in Victoria into Calgary and Edmonton, as well as consolidation of the
conference operation into the Lower Mainland of B.C. Additionally, management
has completed the consolidation of two field dispatch centres in Greater
Vancouver into Calgary. Through these initiatives, approximately 525 employees
have accepted either an offer of redeployment or a voluntary departure
package. The Company is also transforming to a more variable cost structure
through the increased use of temporary employees, which management expects to
allow better synchronization of resources with variable customer demand.
In the area of process improvement and automation, TELUS continues to focus on
streamlining functional area processes, which includes building on the
learnings from the deployment of management teams during the 2005 labour
disruption. Examples include automating directory listing functions and making
process improvements in business support functions, such as human resources.
TELUS is experiencing short conventional payback periods with respect to
office and call centre consolidations, whereas in the area of outsourcing
activities, implementation takes longer and paybacks can extend over several
years. It should be noted, however, that all such initiatives are expected to
provide positive economic returns.
In addition, two new collective agreements in the province of Quebec were
negotiated and ratified in 2006. In the first quarter of 2006, TELUS Quebec
and the Syndicat des agents de maitrise de TELUS concluded negotiations for a
new collective agreement covering more than 500 professional and supervisory
employees. This one-year agreement came into effect on April 1. In July, TELUS
Quebec and Syndicat quebecois des employes de TELUS reached an agreement,
which was ratified at the end of August. The agreement covers more than 1,000
office, clerical and technical employees, and is effective until the end of
2009.
3. Key performance drivers
The following discussion is qualified in its entirety by the Forward-looking
statements at the beginning of Management's discussion and analysis. It is
also qualified by Section 10: Risks and risk management.
Management sets new corporate priorities each year to advance TELUS' strategy,
focus on the near-term opportunities and challenges and create value for
shareholders.
3.1 Corporate priorities for 2006 - reporting back
Management developed new corporate priorities for 2006 to advance its
industry-leading strategy, achieve meaningful commercial differentiation in
the markets, capitalize on the technology convergence of wireless and
wireline, and drive continued operating efficiency and effectiveness.
------------------------------------------------------------------------------
2006 corporate priorities across wireline and wireless
------------------------------------------------------------------------------
Advance TELUS' leadership in the consumer market
* TELUS expanded wireless high-speed (EVDO) service to two-thirds of the
Canadian population . Combined with the newest portable communications
devices, TELUS is delivering innovative mobile data and entertainment
solutions.
* TELUS introduced SPARK, a new name for its portfolio of mobile
entertainment, information and messaging services for consumers. These
services include TELUS Mobile Music, TELUS Mobile Radio, TELUS Mobile TV
and Apnes Des, a South Asian entertainment service featuring video, news
and sports.
* To reaffirm the Company's commitment to excellent customer service,
TELUS launched three Future Friendly (R) Promises to mobile clients: a
dependable network, fast client service and new phone offers. The success
of this program is evident by TELUS' churn rates that are among the
lowest in North America.
* A three-year, $600 million investment program to enhance TELUS'
broadband network in B.C., Alberta and Eastern Quebec was announced,
paving the way for emerging services such as high-definition TELUS TV.
* TELUS TV services were rolled into select neighbourhoods in the Lower
Mainland of B.C., delivering 100% digital TV to consumers. In addition,
employee trials of TELUS TV service began in Eastern Quebec.
* Compelling high-speed Internet (ADSL) promotions helped TELUS achieve
153,700 net additions of Internet subscribers in 2006, which outpaced a
major cable-TV competitor.
* TELUS implemented community-focused general manager positions across
B.C., Alberta and Quebec to improve consumer and business service
delivery.
* ADSL service was expanded to 117 rural neighbourhoods in Quebec in
preparation for the 2007 consumer launch of TELUS TV and continued growth
in TELUS' share of the Quebec market.
Advance TELUS' position in the business market
* A five-year, $140 million contract was won with the Government of
Ontario to provide fully managed network access services.
* Several other multi-million dollar contracts were also secured,
including those with Alberta Treasury Branches (ATB) Financial, Consumer
Impact Marketing and Finning International.
* The business brand "Backed by TELUS" was launched and innovative
solutions were introduced, including the TELUS Business One (R) bundle,
TELUS SafetyNet (TM) service, Wireless Physician, Integrated Bedside
Terminal, Crisis Management Conferencing and Wireless Field Ticketing. In
addition, the portfolio of wireless solutions was expanded, including
wireless high-speed services, Push To Talk service and GPS solutions.
* TELUS strengthened its capabilities by acquiring Assurent Secure
Technologies, a world-leading Canadian information technology security
services company. TELUS' AssureLogic security solution received a
globally recognized certification.
Advance TELUS' position in the wholesale market
* TELUS was recognized for the fourth time by The Paisley Group as a
leader in directory assistance services, and was named number one in
Canada and number two in the U.S.
Drive improvements in productivity and service excellence
* TELUS successfully launched a pilot conversion for a sample set of more
than 20,000 Alberta customers, as part of a major billing system
consolidation project.
* In major centres in B.C. and Alberta, TELUS increased the proportion of
installation and repair appointments offered to customers on a two-hour
or four-hour window basis.
* More than 1,200 field technicians were trained to promote and provide
additional services during installation and repair visits, as part of the
TELUS Solutions Program, generating additional sales.
* TELUS opened a new centre of excellence in Montreal to align tier 1 and
tier 2 technical support operations for small business, and to
consolidate call centre entry points from four to one, providing quicker
resolution of issues and bilingual support.
* TELUS aligned the human resources, finance, logistics and project
management systems and processes of TELUS Quebec, TELUS Solutions
d'Affaires and the eastern operations of TELUS Mobility.
* TELUS launched "Habitat," an integrated, bilingual portal for all team
members across Canada.
Strengthen the spirit of the TELUS team and brand, and develop the best
talent in the global communications industry
* Through periodic electronic surveys of employees, known as pulse check,
TELUS obtains crucial feedback about the business. In the latest survey,
notable improvements were measured in team member engagement, pride and
outlook for the future.
* On September 30, more than 5,000 TELUS team members, alumni and family
across Canada volunteered their time and energy to 1,400 volunteer
projects and activities as part of the TELUS National Day of Service.
* TELUS, its team members and retirees pledged $5.5 million in the 2006
Dollars for Dollars campaign, which will be distributed in 2007 to
Canadian charities.
* In 2006, TELUS held more than 150 external recruiting events to attract
talented new team members to the Company at all levels across many
disciplines. The events included job fairs, information sessions,
academic sponsorships and innovative canvassing efforts.
* TELUS' brand was showcased through hosting of events such as the TELUS
Skins and TELUS World Ski and Snowboard Festival.
* For the third consecutive year, TELUS was awarded a Thomson Illuminati
award for worldwide excellence in employee learning programs and
practices.
* The Company launched the TELUS Community Ambassadors(TM) program giving
support to team members and alumni for programs such as those that supply
backpacks of school supplies to children in need.
* The Company now has seven fully functional TELUS Community Boards,
which include external community leaders who help direct annual
donations of $3.5 million to worthwhile causes in seven cities across
Canada.
------------------------------------------------------------------------------
3.2 Corporate priorities for 2007
Each year, TELUS identifies key corporate priorities that support its national
growth strategy and create value for investors.
------------------------------------------------------------------------------
2007 corporate priorities
------------------------------------------------------------------------------
Advancing TELUS' leadership position in the consumer market
* Combining TELUS' suite of data applications with deregulated heritage
services
* Attaining best-in-class customer loyalty and growth through unparalleled
customer experiences
* Achieving customer addition targets by expanding distribution channels and
addressing key market segments with new service offerings.
------------------------------------------------------------------------------
Advancing TELUS' leadership position in the business market
* Progressing further in key industry verticals with specific applications
that provide non-price-based differentiation
* Leveraging wireless number portability to expand TELUS' business market
share in Central Canada
* Focusing on small business customer loyalty and growth with innovative
solutions
------------------------------------------------------------------------------
Advancing TELUS' leadership position in the wholesale market
* Growing in domestic and international markets through recognition that
TELUS is Canada's IP leader
* Achieving excellence in customer service to support local forbearance in
key incumbent markets
* Expanding the Company's markets, channels and products by focusing on
strategic relationships with TLEUS' partners.
------------------------------------------------------------------------------
Driving TELUS' technology evolution and improvements in productivity and
service excellence
* Implementing technology roadmaps for Future Friendly Home and wireless
service offerings that simplify TELUS' product portfolio and improve
service development and execution
* Rolling out consolidated customer care systems to replace multiple legacy
systems in Alberta and B.C.
* Accelerating customer service delivery dates.
------------------------------------------------------------------------------
Strengthening the spirit of the TELUS team and brand, and developing the best
talent in the global communications industry
* Growing TELUS' business ownership culture with a team philosophy of "our
business, our customers, our team, my responsibility" thereby attracting,
developing and retaining great talent
* Leading the way in corporate social responsibility as TELUS strives to be
Canada's premier corporate citizen.
-----------------------------------------------------------------------------
4. Capability to deliver results
4.1 Principal markets addressed and competitors
------------------------------------------------------------------------------
National wireless services for consumers and businesses
------------------------------------------------------------------------------
TELUS has facilities-based services with access to approximately 95% of
the Canadian population, operating a CDMA network with state-of-the-art
high-speed EVDO (evolution data optimized) in major centres, and
iDEN-based Push To Talk service focused on the commercial marketplace.
Competition includes: (i) facilities-based competitors such as Rogers
Wireless and Bell Mobility, nationally, and wireless offerings by various
regional telcos including SaskTel and MTS Mobility; and (ii) resellers of
Bell and Rogers networks, such as the Virgin Mobile Group, 7-Eleven and
certain cable-TV companies.
------------------------------------------------------------------------------
National wireline business services
------------------------------------------------------------------------------
TELUS has an IP-based national network overlaying an extensive switched
network in incumbent territories in B.C., Alberta and Eastern Quebec.
Access services and certain competitive digital network access services
are subject to rate regulation in these incumbent territories. Operations
in non-incumbent areas of Ontario and Quebec are not rate regulated.
Managed solutions, such as the provision of human resources outsourcing
services to business customers, are offered nationally. Wholesale
services are provided to telecommunications carriers, resellers, Internet
service providers (ISPs), wireless communications companies, competitive
local access providers and cable-TV operators.
Competition for voice and data communications services includes Bell
Canada and Manitoba Tel (Allstream) competing with their own national
infrastructures, and others such as Navigata (owned by SaskTel), as well
as substitution to wireless services including those offered by TELUS.
Competitors for managed solutions include system integrators CGI, EDS and
IBM.
------------------------------------------------------------------------------
Wireline consumer services in incumbent territories
------------------------------------------------------------------------------
TELUS has access to virtually every urban and rural home in its incumbent
territories in B.C., Alberta and Eastern Quebec. Through an extensive
switched network and significant investment in Internet infrastructure,
the Company provides local, long distance and Internet services. The
Company also has broadcasting distribution licences to offer digital
television services in select communities across its incumbent
territories, and licences to offer commercial video-on-demand services. A
staged neighbourhood-by-neighbourhood roll-out of TELUS TV services is
underway.
Competition includes: (i) substitution of wireless services, including
TELUS' own wireless offerings, for local and long distance services; (ii)
cable-TV providers Shaw Communications Inc. in B.C. and Alberta, and
Cogeco Cable Inc. in Eastern Quebec, which have access to most urban and
suburban homes, and provide Internet, entertainment and VoIP-based
telephony services; (iii) Rogers Communications, Navigata, Primus,
Vonage, Bell Canada and various others that collectively offer local
service, Internet and long distance services; and (iv) satellite-based
entertainment and Internet services.
------------------------------------------------------------------------------
4.2 Operational capabilities
Regulation
Less than one-third of the Company's revenues are from wireline segment
regulated services and subject to CRTC price regulation. None of the Company's
wireless segment revenues are currently subject to CRTC regulation. Wireline
regulated services include residential and business services in incumbent local
exchange carrier (ILEC) regions, competitor services and payphone services.
Services that are forborne from regulation include non-incumbent local exchange
carrier (non-ILEC) services, long distance services, Internet services,
international telecommunications services, inter-exchange private line
services, certain data services, and the sale of customer premises equipment.
Major areas of regulatory review in 2007 include the framework for forbearance
from regulation of local exchange services, price cap regulation, high-speed
intra-exchange digital services, and the use of funds in ILECs' deferral
accounts. See Section 10.3 Regulatory.
There has been some speculation that Industry Canada may encourage additional
competition through a spectrum auction, expected in 2008, by capping the amount
of spectrum any one provider can purchase or setting spectrum aside for a new
entrant. See Section 10.1 Competition - Future availability of wireless
spectrum.
Development of a new billing system in the wireline segment
The development of a new wireline billing system progressed in 2006. The
development includes re-engineering processes for order entry,
pre-qualification, service fulfillment and assurance, customer care,
collections/credit, customer contact, and information management. The expected
customer service and cost benefits of this project include streamlined and
standardized processes and the elimination over time of multiple legacy
information systems. In the third quarter of 2006, the Company successfully
implemented a pilot conversion for a sample set of customers. A commercial
launch of the converged billing system platform for consumer accounts is
expected to progress in 2007, with additional phases of conversion planned over
the next few years. See Section 10.5 Process risks.
4.3 Liquidity and capital resources
The following discussion is qualified in its entirety by the Forward-looking
statements at the beginning of Management's discussion and analysis, as well as
Section 9.3 Financing plan for 2007 and Section 10.6 Financing and debt
requirements.
Capital structure financial policies (Note 3 of the Consolidated financial
statements)
The Company's objectives when managing capital are: (i) to maintain a flexible
capital structure which optimizes the cost of capital at acceptable risk; and
(ii) to manage capital in a manner which balances the interests of equity and
debt holders.
In the management of capital, the Company includes shareholders' equity,
long-term debt (including any associated hedging assets or liabilities), cash
and temporary investments and securitized accounts receivable in the definition
of capital.
The Company manages the capital structure and makes adjustments to it in light
of changes in economic conditions and the risk characteristics of the
underlying assets. In order to maintain or adjust the capital structure, the
Company may adjust the amount of dividends paid to shareholders, purchase
shares for cancellation pursuant to normal course issuer bids, issue new
shares, issue new debt, issue new debt to replace existing debt with different
characteristics and/or increase or decrease the amount of sales of trade
receivables to an arm's-length securitization trust. In its annual Management's
discussion and analysis, management describes its financing plan. The results
of TELUS' 2006 financing plan are presented in the table below.
The Company monitors capital on a number of bases, including: net debt to total
capitalization; net debt to EBITDA - excluding restructuring and workforce
reduction costs; and dividend payout ratio of sustainable net earnings. For
further discussion and specific guidelines, see Section 7.4 Liquidity and
capital resource measures.
Liquidity and financing
At December 31, 2006, TELUS had access to undrawn credit facilities of more
than $1.4 billion. The Company believes it has sufficient capability to fund
its requirements from these facilities and expected cash flow from operations.
The following table describes the status of TELUS' financing plan.
------------------------------------------------------------------------------
2006 financing plan and results
------------------------------------------------------------------------------
TELUS' 2006 financing plan was to use free cash flow generated by its business
operations to:
------------------------------------------------------------------------------
* Repurchase TELUS Common Shares and TELUS Non-Voting Shares under the
normal course issuer bid (NCIB)
The Company's NCIB program was renewed effective December 20, 2006 and
with an expiry of December 19, 2007. During 2006, approximately
5.5 million Common Shares and 10.9 million Non-Voting Shares were
repurchased for cancellation for a total outlay of approximately
$800 million. Between December 20, 2004 and December 31, 2006, the
Company repurchased approximately 16 million Common Shares and 23 million
Non-Voting Shares for a total outlay of $1.77 billion under three NCIB
programs. See Section 7.3 Cash used by financing activities.
* Pay dividends
Quarterly dividends of 27.5 cents per share were paid in 2006 for an
annual total of $1.10. The declared dividend for the fourth quarter of
2006, payable on January 1, 2007, was 37.5 cents per share, an increase
of 36.4%.
* Retain cash-on-hand for corporate purposes
The $500 million balance of securitized accounts receivable was unchanged
at December 31, 2006 when compared to one year earlier. During 2006, the
balance varied between $325 million and $535 million.
Amounts outstanding under the three-year credit facility and other bank
facilities were $121 million at December 31, a decrease of $21 million
from December 31, 2005.
------------------------------------------------------------------------------
Other financing objectives included:
------------------------------------------------------------------------------
* Maintain a minimum $1 billion in unutilized liquidity
TELUS had available liquidity from unutilized credit facilities of more
than $1.4 billion at December 31, 2006.
* Maintain position of fully hedging foreign exchange exposure for
indebtedness
In contemplation of the planned refinancing of the 2007 (U.S. dollar)
Notes, in May 2006 the Company replaced approximately 63% of the notional
value of the existing cross currency interest rate swap agreements with a
like amount of new cross currency interest rate swap agreements, which
have a lower effective fixed interest rate and a lower effective fixed
exchange rate. This replacement happened concurrent with the issuance of
the 2013 (Canadian dollar) Notes (see below); the two transactions had
the composite effect of deferring, from June 2007 to June 2013, the
payment of $300 million.
* Give consideration to refinancing all or a portion of U.S. dollar
denominated Notes due June 1, 2007 in advance of their scheduled maturity
Concurrently with the above, in May 2006, the Company publicly issued
$300 million 5.00%, Series CB, Notes, which mature in 2013. The net
proceeds of the offering were used to pay for the early termination of
cross currency swap agreements described above. In contemplation of the
planned refinancing of the U.S. $1.17 billion of debt maturing
June 1, 2007, the Company had entered into forward starting interest rate
swap agreements during 2006 that, as at December 31, 2006, have the
effect of fixing the underlying interest rate on up to $500 million of
replacement debt.
* Preserve access to the capital markets at a reasonable cost by
maintaining investment grade credit ratings and targeting improved credit
ratings in the range of BBB+ to A-, or the equivalent, in the future
Investment grade credit ratings from the four rating agencies that cover
TELUS were maintained. The ratings assigned by three credit rating
agencies are currently within TELUS' desired range, while Moody's
Investors Service's Baa2 rating for TELUS (equivalent to BBB) is one
position below TELUS' desired range. In November 2006, Moody's placed its
rating for TELUS under review for possible upgrade.
4.4 Management's report on disclosure controls and procedures and internal
control over financial reporting
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance
that all relevant information is gathered and reported to senior management,
including the President and Chief Executive Officer (CEO) and the Executive
Vice-President and Chief Financial Officer (CFO), on a timely basis so that
appropriate decisions can be made regarding public disclosure.
The CEO and the CFO have evaluated the effectiveness of the Company's
disclosure controls and procedures related to the preparation of the
Management's discussion and analysis and the Consolidated financial statements.
They have concluded that the Company's disclosure controls and procedures were
effective, at a reasonable assurance level, to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known
to them by others within those entities, particularly during the period in
which the Management's discussion and analysis and the Consolidated financial
statements contained in this report were being prepared.
Internal control over financial reporting
Internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements in accordance with Canadian generally accepted
accounting principles and the requirements of the Securities and Exchange
Commission in the United States, as applicable. TELUS' CEO and CFO have
assessed the effectiveness of the Company's internal control over financial
reporting as at December 31, 2006 in accordance with Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, TELUS' CEO and CFO have
determined that the Company's internal control over financial reporting is
effective as at December 31, 2006 and expect to certify TELUS' annual filings
with the U.S. Securities and Exchange Commission on Form 40-F as required by
the United States Sarbanes-Oxley Act and with Canadian securities regulatory
authorities.
Deloitte & Touche LLP, the shareholders' auditors, have audited management's
assessment of TELUS' internal control over financial reporting in addition to
the Company's Consolidated financial statements as at December 31, 2006. In
order to provide their independent opinions, Deloitte & Touche reviewed the
Company's system of internal controls and performed any audit procedures to the
extent they considered appropriate.
Changes in internal control over financial reporting
There were no changes in internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
5. Results from operations
5.1 Selected annual information
The following selected three-year consolidated financial information has been
derived from and should be read in conjunction with the Consolidated financial
statements of TELUS for the year ended December 31, 2006, and its annual
Consolidated financial statements for previous years.
--------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 2006 2005 2004
($ in millions except per share amounts)
--------------------------------------------------------------------------------------------------------------------------------
Operating revenues 8,681.0 8,142.7 7,581.2
Operations expense 5,022.9 4,793.5 4,438.0
Restructuring and workforce reduction costs 67.8 53.9 52.6
Financing costs and other expense 532.7 641.5 622.0
Income before income taxes and non-controlling interest 1,482.0 1,030.1 825.5
Income taxes 351.0 322.0 255.1
Net income 1,122.5 700.3 565.8
Common Share and Non-Voting Share income 1,122.5 700.3 564.0
Earnings per share(1) - basic 3.27 1.96 1.58
Earnings per share(1) - diluted 3.23 1.94 1.57
Cash dividends declared per share(1) 1.20 0.875 0.65
Total assets 16,508.2 16,222.3 17,838.0
Current maturities of long-term debt 1,434.4 5.0 4.3
Long-term debt 3,493.7 4,639.9 6,332.2
Deferred hedging and other long-term financial
liabilities 1,037.2 1,420.9 1,293.8
--------------------------------------------------------------------------------------------------------------------------------
Total long-term financial liabilities 4,530.9 6,060.8 7,626.0
Future income taxes 1,067.3 1,023.9 991.9
Non-controlling interest 23.6 25.6 13.1
Common equity 6,928.1 6,870.0 7,016.8
---------------------------------------------------------------------------------------------------------------------------------
(1) Includes Common Shares and Non-Voting Shares.
--------------------------------------------------------------------------------------------------------------------------------
Some changes over the three years include:
* Wireless and data revenues increased to approximately 63% of
consolidated revenues in 2006 (approximately 59% in 2005 and 56% in
2004).
* Consolidated operations expense in 2005 included the effects of a
four-month labour disruption including incremental expenses of
approximately $133 million net of cost savings. These incremental
affected the wireline segment.
* Financing costs in 2005 included a $33.5 million loss on early
redemption of $1.578 billion of Canadian dollar Notes on December 1,
2005.
* Net income included significant favourable tax adjustments, including
interest and the effects of tax rate changes on future income tax
liabilities and assets. The amounts were approximately $165 million (48
cents per share) in 2006, approximately $70 million (20 cents per share)
in 2005, and approximately $86 million (24 cents per share) in 2004.
5.2 Quarterly results summary
-------------------------------------------------------------------------------------------------------------------------------
($ in millions,
except per
share amounts) 2006 Q4 2006 Q3 2006 Q2 2006 Q1 2005 Q4 2005 Q3 2005 Q2 2005 Q1
--------------------------------------------------------------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,234.3 1,200.3 1,189.9 1,198.6 1,209.9 1,198.6 1,216.5 1,222.2
Wireless segment 1,020.3 1,010.4 945.3 881.9 876.8 864.2 802.0 752.5
--------------------------------------------------------------------------------------------------------------------------------
Operating revenues
(consolidated) 2,254.6 2,210.7 2,135.2 2,080.5 2,086.7 2,062.8 2,018.5 1,974.7
Operations expense 1,368.6 1,245.8 1,207.4 1,201.1 1,316.8 1,221.5 1,146.1 1,109.1
Restructuring and workforce
reduction costs 7.9 12.5 30.7 16.7 35.5 1.6 7.4 9.4
--------------------------------------------------------------------------------------------------------------------------------
EBITDA (1) 878.1 952.4 897.1 862.7 734.4 839.7 865.0 856.2
Depreciation 353.2 325.8 335.2 339.2 346.2 335.6 330.9 329.9
Amortization of intangible
assets 53.9 57.5 46.9 63.9 67.0 73.6 68.2 72.3
--------------------------------------------------------------------------------------------------------------------------------
Operating income 471.0 569.1 515.0 459.6 321.2 430.5 465.9 454.0
Other expense (income) 10.1 4.0 9.6 4.3 9.3 7.1 0.5 1.5
Financing costs 133.6 116.6 127.5 127.0 171.7 144.8 168.2 138.4
--------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 327.3 448.5 377.9 328.3 140.2 278.6 297.2 314.1
Income taxes 89.7 126.5 18.7 116.1 58.8 86.9 106.0 70.3
Non-controlling interests 1.4 2.4 2.6 2.1 2.9 1.6 1.7 1.6
--------------------------------------------------------------------------------------------------------------------------------
Net income 236.2 319.6 356.6 210.1 78.5 190.1 189.5 242.2
================================================================================================================================
Income per Common Share and
Non-Voting Share - basic 0.70 0.94 1.03 0.60 0.22 0.53 0.53 0.67
- diluted 0.69 0.92 1.02 0.60 0.22 0.53 0.52 0.66
Dividends declared per Common
Share and Non-Voting Share 0.375 0.275 0.275 0.275 0.275 0.20 0.20 0.20
--------------------------------------------------------------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before interest, taxes,
depreciation and amortization (EBITDA).
The trend in consolidated Operating revenues continues to reflect strong
growth in wireless revenue, which was a record quarterly amount for TELUS in
the fourth quarter of 2006. In addition, wireline revenue for the fourth
quarter of 2006 was the highest quarterly amount in four years. Wireless
revenue growth is due to increasing ARPU as well as a growing subscriber base.
ARPU, in turn, is growing due to increasing provision and adoption of wireless
data services, which is more than offsetting the decline in voice ARPU. The
trend also reflects growth in wireline segment data revenue, while wireline
voice local and long distance revenues are decreasing. In addition to
continued substitution to wireless services, the impact of increased
competition from VoIP competitors and resellers on wireline revenues became
apparent in 2006. Decreases in long distance revenues are consistent with
industry-wide trends of strong price competition and technological
substitution (to Internet and wireless). Wireline revenues until May 31, 2006
include the generally negative effect of regulatory price cap decisions.
Historically, there is significant fourth quarter seasonality with higher
wireless subscriber additions and related acquisition costs and equipment
sales, resulting in lower wireless EBITDA. The seasonality affects, to a
lesser extent, wireline high-speed Internet subscriber additions and related
costs.
The trend in Operating income was affected by temporary net expenses leading
up to and resulting from an extended labour disruption in 2005; such temporary
expenses included in Operations expense were estimated to be approximately
$16 million, $65 million and $52 million, respectively, for the second, third
and fourth quarters of 2005. Restructuring and workforce reduction charges
varied by quarter, depending on the progress of ongoing initiatives underway.
Depreciation expense in the fourth quarter of 2006 includes a provision of
approximately $17 million to align estimated useful lives for TELUS Quebec
assets, resulting from integration of financial systems. Amortization of
intangible assets is decreasing as several software assets have been fully
amortized. Amortization expenses in the second quarter and fourth quarter of
2006 were reduced by approximately $12 million and $5 million, respectively,
for investment tax credits following a determination of eligibility by a
revenue authority relating to assets capitalized in prior years that are now
fully amortized.
Within Financing costs, interest expenses trended lower except for the
following items: (i) interest expense in respect of a court decision in a
lawsuit related to a 1997 BC TEL bond redemption (including $17.5 million in
the second quarter of 2005 and $7.8 million in the fourth quarter of 2006 -
see Section 10.9 Litigation and legal matters); and (ii) a charge of
$33.5 million in the fourth quarter of 2005 for early redemption of
$1.578 billion of Notes. The early redemption of Notes on December 1, 2005,
contributed to lower financing costs in 2006. Financing costs are net of
varying amounts of interest income.
The trend in Net income and earnings per share reflect the items noted above
as well as a second quarter 2006 future income tax reduction arising from
enacted income tax rate reductions and the elimination of the federal large
corporations tax. The trend was also affected by tax adjustments and related
interest for prior periods; the larger quarterly amounts were approximately
$20 million or six cents per share in the fourth quarter of 2006,
approximately $30 million (nine cents per share) in the third quarter of 2006,
approximately $115 million (33 cents per share) in the second quarter of 2006,
approximately $17 million (five cents per share) in the third quarter of 2005
and approximately $54 million (15 cents per share) in the first quarter of
2005.
Further detail on TELUS' fourth quarter results were included in the
Management's discussion and analysis contained in the February 2007 news
release, filed on SEDAR and EDGAR.
5.3 Consolidated results from operations
($ in millions except EBITDA margin) Years ended December 31
2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
Operating revenues 8,681.0 8,142.7 6.6 %
Operations expense 5,022.9 4,793.5 4.8 %
Restructuring and workforce reduction costs 67.8 53.9 25.8 %
--------------------------------------------------------------------------------------------------------------------------------
EBITDA (1) 3,590.3 3,295.3 9.0 %
Depreciation 1,353.4 1,342.6 0.8 %
Amortization of intangible assets 222.2 281.1 (21.0)%
--------------------------------------------------------------------------------------------------------------------------------
Operating income 2,014.7 1,671.6 20.5 %
--------------------------------------------------------------------------------------------------------------------------------
EBITDA margin (%) (2) 41.4 40.5 0.9 pts
Total employees at end of period 31,955 29,819 7.2 %
-------------------------------------------------------------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before interest,
taxes, depreciation and amortization (EBITDA).
(2) EBITDA margin is EBITDA divided by Operating revenues.
-------------------------------------------------------------------------------------------------------------------------------
The following discussion is for the consolidated results of TELUS. Further
detail by segment is provided for Operating revenues, Operations expense,
Restructuring and workforce reduction costs, EBITDA and Capital expenditures
in Section 5.4 Wireline segment results, Section 5.5 Wireless segment results
and Section 7.2 Cash used by investing activities - capital expenditures.
Operating revenues
Consolidated Operating revenues increased by $538.3 million in 2006 when
compared with 2005. The increase was due to growth in wireless revenues and
wireline data revenues, which exceeded erosion in wireline voice local and
long distance revenues.
Operations expense
Consolidated operations expense increased by $229.4 million in 2006 when
compared with 2005. Operations expense in 2005 included net labour disruption
expenses of approximately $133 million, which were primarily in the wireline
segment. Excluding labour disruption impacts, consolidated operations expenses
increased primarily due to growth in the wireless segment, increased wireline
advertising, promotions and costs of sales, and restructuring charges. The net
expense for defined benefit pension plans did not change significantly, as
favourable returns on plan assets in 2005 offset the use of a lower discount
rate for 2006.
The number of employees increased by 7.2%, reflecting growth in the wireless
segment and TELUS' wireline international call centre operations.
Restructuring and workforce reduction costs
Restructuring and workforce reduction costs increased by $13.9 million in 2006
when compared to 2005. TELUS' estimate of restructuring and workforce
reduction costs in 2007, which arises from its competitive efficiency program
and includes the continued integration of wireline and wireless operations,
does not currently exceed $50 million.
General
In 2005, the Company undertook a number of smaller initiatives, such as
operational consolidation, rationalization and integrations. These initiatives
aimed to improve the Company's operating and capital productivity. As at
December 31, 2006, no future expenses remain to be accrued or recorded under
the smaller initiatives, but variances from estimates currently recorded may
be recorded in subsequent periods. On November 24, 2005, the Company announced
the integration of its wireline and wireless operations, an initiative that
will continue into future years and is a component of the Company's
competitive efficiency program.
In the first quarter of 2006, arising from its competitive efficiency program,
the Company undertook a number of smaller initiatives, such as operational
consolidation, rationalization and integration. These initiatives are aimed to
improve the Company's operating productivity and competitiveness. For the year
ended December 31, 2006, $37.9 million of restructuring and workforce
reduction costs were recorded in respect of these smaller initiatives.
Also arising from its competitive efficiency program, the Company undertook an
initiative for a departmental reorganization and reconfiguration, resulting in
integration and consolidation. In the first quarter of 2006, approximately 600
bargaining unit employees were offered the option of redeployment or
participation in a voluntary departure program (either the Early Retirement
Incentive Plan or the Voluntary Departure Incentive Plan). In the second
quarter of 2006, approximately 275 bargaining unit employees accepted either
the option of redeployment or participation in a voluntary departure program.
In 2006, $17.7 million of restructuring and workforce reduction costs were
recorded in respect of this initiative and were included with general programs
initiated in 2006. As at December 31, 2006, no future expenses remain to be
accrued or recorded under this initiative, but variances from estimates
currently recorded may be recorded in subsequent periods.
Continuing with its competitive efficiency program for the integration of
wireline and wireless operations, $12.2 million of restructuring and workforce
reduction costs were recorded for the year ended December 31, 2006 in respect
of this initiative and were included with general programs initiated in 2006.
Office closures and contracting out
In connection with the collective agreement signed in the fourth quarter of
2005, an accompanying letter of agreement set out the planned closure, on
February 10, 2006, of a number of offices in British Columbia. This initiative
is a component of the Company's competitive efficiency program and is aimed at
improving the Company's operating and capital productivity. The approximately
250 bargaining unit employees affected by these office closures were offered
the option of redeployment or participation in a voluntary departure program
(either the Early Retirement Incentive Plan or the Voluntary Departure
Incentive Plan).
As at December 31, 2006, no future expenses remain to be accrued or recorded
under the letter of agreement setting out the planned closure of a number of
offices in British Columbia, but variances from estimates currently recorded
may be recorded in subsequent periods. Other costs, such as other employee
departures and those associated with real estate, will be incurred and
recorded subsequent to December 31, 2006.
Similarly, an additional accompanying letter of agreement set out that the
Company intends to contract out specific non-core functions over the term of
the collective agreement. This initiative is a component of the Company's
competitive efficiency program and is aimed at allowing the Company to focus
its resources on those core functions that differentiate the Company for its
customers. The approximately 250 bargaining unit employees currently affected
by contracting out initiatives were offered the option of redeployment or
participation in a voluntary departure program (either the Early Retirement
Incentive Plan or the Voluntary Departure Incentive Plan).
As at December 31, 2006, no future expenses remain to be accrued or recorded
under the letter agreement setting out the contracting out of specific
non-core functions, in respect of the approximately 250 bargaining unit
employees currently affected, but variances from estimates currently recorded
may be recorded in subsequent periods. Future costs will be incurred as the
initiative continues.
EBITDA
EBITDA increased by $295.0 million in 2006, when compared with 2005. Excluding
labour disruption expense impacts in 2005, consolidated EBITDA increased by
approximately $162 million due primarily to growth in the wireless segment,
partly offset by decreases in wireline segment EBITDA.
Depreciation and amortization expenses
Depreciation expense increased by $10.8 million in 2006 when compared with
2005. The increase primarily reflected a fourth quarter provision of
approximately $17 million to align estimated useful lives for TELUS Quebec
assets upon integration of financial systems, partly offset by a reduction in
expense as more assets are fully depreciated.
Amortization of intangible assets decreased by $58.9 million in 2006 when
compared with 2005. The decrease was primarily as a result of several software
assets becoming fully amortized. In addition, the decrease included
approximately $17 million recorded in 2006 to recognize investment tax credits
following a determination of eligibility by a revenue authority, for assets
capitalized in prior years that are now fully amortized.
Operating income
Operating income increased by $343.1 million in 2006, when compared with 2005,
due primarily to growth in EBITDA and reduced amortization of intangible
assets, as described above.
Other income statement items
Other expense, net Years ended December 31
($ millions) 2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
28.0 18.4 52.2 %
--------------------------------------------------------------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense, charitable
donations, gains and losses on disposal of real estate, and income (loss) or
impairments in equity or portfolio investments. The accounts receivable
securitization expense was $18.0 million in 2006, as compared to $7.3 million
in 2005. The increase resulted primarily from a higher balance of proceeds
from securitized accounts receivable in 2006 (see Section 7.6 Accounts
receivable sale). Net gains on the sale of investments and real estate in 2006
exceeded net gains in 2005, and charitable donations increased.
[graphs - interest on long-term and short-term debt; interest income]
Financing costs Years ended December 31
($ millions) 2006 2005 Change
-------------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt:
Before estimates for settlement of a lawsuit 499.0 618.0 (19.3)%
Estimates for settlement of a lawsuit 9.0 17.5 (48.6)%
Interest on short-term debt and other 2.6 8.2 (68.3)%
-------------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt, short-term obligations and other 510.6 643.7 (20.7)%
Loss on debt redemption -- 33.5 (100.0)%
Foreign exchange losses (gains) 6.4 4.6 39.1 %
Interest income (12.3) (58.7) 79.0 %
--------------------------------------------------------------------------------------------------------------------------------
504.7 623.1 (19.0)%
=================================================================================================================================
Interest on long-term debt, excluding estimates to settle a lawsuit, decreased
by $119.0 million in 2006, when compared with 2005. The decrease was due
primarily to early redemption of $1.578 billion of 7.50%, Series CA, Notes on
December 1, 2005, for which a $33.5 million loss on redemption was recorded in
2005. The decrease was also due to the conversion/redemption of convertible
debentures in the second quarter of 2005. Amounts totalling $26.5 million were
recorded in 2005 and 2006 in respect of court decisions in a lawsuit related
to a 1997 BC TEL bond redemption matter. See Section 10.9 Litigation and legal
matters. Debt, measured as the sum of Long-term debt, current maturities and
the net deferred hedging liability, was $5,767 million at December 31, 2006,
as compared to $5,803 million on December 31, 2005.
Increased interest expense associated with the May 2006 public issue of
$300 million of Notes was offset by a reduction in interest expense resulting
from replacement of certain previous cross currency interest rate swap
agreements associated with 2007 U.S. dollar Notes. The replacement swaps
have a lower effective fixed interest rate as well as a more favourable
effective fixed exchange rate. TELUS' hedging program using cross currency
swaps continues for its 2007 and 2011 U.S. dollar Notes.
Interest income decreased by $46.4 million in 2006, when compared with 2005,
due primarily to: (i) lower cash and temporary investments as available cash
balances were used for the December 2005 debt redemption; and (ii) recognition
of greater tax refund interest in 2005.
--------------------------------------------------------------------------------------------------------------------------------
Income taxes Years ended December 31
($ millions, except tax rates) 2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
Blended federal and provincial statutory income tax
based on net income before tax 497.3 352.3 41.2 %
Revaluation of future tax liability for change in statutory
tax rates (107.0) (5.1) --
Tax rate differential on, and consequential adjustments
from, reassessments for prior years (40.3) (13.9) --
Changes in estimates of available deductible differences
in prior years -- (37.5) --
Other and large corporations tax 1.0 26.2 --
--------------------------------------------------------------------------------------------------------------------------------
351.0 322.0 9.0 %
--------------------------------------------------------------------------------------------------------------------------------
Blended federal and provincial statutory tax rates (%) 33.6 34.2 (0.6) pts
Effective tax rates (%) 23.7 31.3 (7.6) pts
--------------------------------------------------------------------------------------------------------------------------------
The 41.2% increase in the blended federal and provincial statutory income tax
expense in 2006, when compared with 2005, relates primarily to the 43.9%
increase in income before taxes. The blended federal and provincial tax rate
for 2006 decreased from 2005 due primarily to a reduction in general corporate
income tax rates on income taxed in Alberta effective April 1, 2006, partly
offset by an increase in general corporate income tax rates in Quebec
beginning January 1, 2006.
The revaluation of net future income tax liabilities in 2006 arose from the
second quarter enactment of both lower federal tax rates for future years and
lower Alberta tax rates. The federal large corporations tax was eliminated
effective January 1, 2006. Reductions in tax expense also resulted from
reassessments for prior years and, in 2005, from changes in estimates of
available deductible differences in prior years.
Based on the assumption of the continuation of the rate of TELUS earnings, the
existing legal entity structure, and no substantive changes to tax
regulations, the Company expects to be able to substantially utilize its
non-capital losses before the end of 2007. The Company's assessment is that
the risk of expiry of such non-capital losses is remote. Under the existing
legal entity structure, TELUS currently expects cash tax payments to be
minimal in 2007, increasing in 2008, with substantial cash tax payments in
2009. The blended federal and provincial statutory tax rate for 2007 is
expected to be approximately 33 to 34%.
Non-controlling interests Years ended December 31
($ millions) 2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
8.5 7.8 9.0 %
--------------------------------------------------------------------------------------------------------------------------------
Non-controlling interests represents minority shareholders' interests in
several small subsidiaries.
[graphs - income before income taxes and non-controlling interest; net income]
5.4 Wireline segment results
Operating revenues - wireline segment Years ended December 31
($ millions) 2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
Voice local 2,119.8 2,174.1 (2.5)%
Voice long distance 810.3 888.4 (8.8)%
Data 1,642.5 1,533.4 7.1 %
Other 250.5 251.3 (0.3)%
--------------------------------------------------------------------------------------------------------------------------------
External operating revenue 4,823.1 4,847.2 (0.5)%
Intersegment revenue 98.3 90.4 8.7 %
--------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 4,921.4 4,937.6 (0.3)%
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Network access lines
At December 31
(000s) 2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
Residential network access lines 2,775 2,928 (5.2)%
Business network access lines 1,773 1,763 0.6 %
--------------------------------------------------------------------------------------------------------------------------------
Total network access lines(1) 4,548 4,691 (3.0)%
Years ended December 31
(000s) 2006 2005 Change
Change in residential network access lines (153) (110) 39.1 %
Change in business network access lines 10 (7) n.m.
---------------------------------------------------------------------------------------------------------------------------------
Change in total network access lines(1) (143) (117) (22.2)%
---------------------------------------------------------------------------------------------------------------------------------
n.m - not meaningful
(1) Network access lines are measured at the end of the reporting period based
on information in billing and other systems. Consistent with the presentation
for 2006, network access lines for 2005, and for the end of 2004, include a
reclassification of approximately nine thousand from residential to business;
no change was recorded in total access lines.
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Internet subscribers
At December 31
(000s) 2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
High-speed Internet subscribers 916.7 763.1 20.1 %
Dial-up Internet subscribers 194.1 236.1 (17.8)%
--------------------------------------------------------------------------------------------------------------------------------
Total Internet subscribers (1) 1,110.8 999.2 11.2 %
Years ended December 31
(000s) 2006 2005 Change
---------------------------------------------------------------------------------------------------------------------------------
High-speed Internet net additions 153.7 73.4 109.4 %
Dial-up Internet net reductions (42.1) (45.5) 7.5 %
--------------------------------------------------------------------------------------------------------------------------------
Total Internet subscriber net additions 111.6 27.9 n.m.
--------------------------------------------------------------------------------------------------------------------------------
(1) Internet subscribers are measured at the end of the reporting period based on
Internet access counts from billing and other systems.
-------------------------------------------------------------------------------------------------------------------------------
Wireline segment revenues decreased by $16.2 million in 2006, when compared
with 2005.
* Voice local revenue decreased by $54.3 million in 2006 when compared
with 2005. The decrease was due primarily to lower revenues from basic
access and optional enhanced services arising from increased competition
for residential subscribers, partly offset by increased managed voice
local services for business. In addition, the decrease included the
impact of one-time regulatory recoveries of approximately $13 million
recorded in the first quarter of 2005.
Residential line losses included the effect of increased competition from
resellers, VoIP competitors including cable-TV companies, technological
substitution to wireless services, and a lower number of second lines
resulting from migration of dial-up Internet subscribers to high-speed
Internet service. In 2006, competitors' cable telephony was introduced in
more places within TELUS' incumbent regions including Fort McMurray,
Rimouski and Vancouver, while in 2005 cable telephony was available in
Calgary (February 2005), Edmonton (April 2005) and Victoria (October
2005). Total business lines increased in 2006 as growth in non-incumbent
regions exceeded competitive losses and migration to more efficient ISDN
(integrated services digital network) services in incumbent local
exchange carrier (ILEC) regions. Business line losses in 2005 included
the loss of a large wholesale business customer.
* Voice long distance revenues decreased by $78.1 million in 2006 when
compared with 2005. The decrease was due primarily to lower consumer and
retail business minute volumes and prices, consistent with industry-wide
trends of strong price competition and technological substitution (to
Internet and wireless). In September 2006, the Company introduced a
simpler set of domestic, North American and international long distance
calling plans directly targeted to the usage patterns of customers. The
plans are for various usage levels combining set per-minute rates with
monthly subscription fees, and are designed to help retain and win back
customers. Improved winback levels were achieved in the fourth quarter.
* Wireline segment data revenues increased by $109.1 million in 2006 when
compared with 2005. This growth was primarily due to increased Internet,
enhanced data and hosting service revenues from growth in business
services and high-speed Internet subscribers. Monthly rates for
high-speed Internet services were raised by one dollar per month in the
second quarter of 2006 for those customers not on rate protection plans,
which contributed to an overall increase in average revenue per
subscriber. Managed data revenues from the provision of business process
outsourcing services to customers also increased. Basic data services and
data equipment sales decreased, partly offset by increased broadcast and
videoconferencing sales and services.
The improvement in high-speed Internet subscriber net additions during
2006 was due partly to new promotions, resulting in increased gross
additions particularly for premium Internet services, which have a higher
monthly rate. In addition, deactivations of existing high-speed Internet
customers decreased. In contrast, the second half of 2005 was constrained
by a labour disruption that limited installation activity.
* Other revenue decreased by $0.8 million in 2006 when compared with
2005, primarily due to a negative adjustment for reduced co-location DC
power rates mandated by the CRTC to be retroactive to November 2000
(Telecom Decision 2006-42-1). This was partly offset by lower quality of
service rate rebates due to improvement in retail and competitor service
levels in 2006 as compared to 2005 when the labour disruption adversely
affected service levels. The Company applied to the CRTC in 2006 for an
exclusion from quality of service rate rebates related to the 2005 labour
disruption and severe flooding events; a decision by the CRTC on the
exclusion application is expected in 2007. Voice equipment sales were
relatively unchanged.
* Intersegment revenue represents services provided by the wireline
segment to the wireless segment. These revenues are eliminated upon
consolidation together with the associated expense in the wireless
segment.
Total external operating revenue included non-ILEC revenues of $656.9 million
and $631.6 million, respectively, for 2006 and 2005, representing an increase
of 4.0% due primarily to growth in enhanced data and managed workplace service
revenues. Voice local revenues increased modestly, while voice and data
equipment sales decreased. Growth in revenues was partly offset by re-pricing
of renewal contracts and competitive pricing affecting new contracts.
Operating expenses - wireline segment Years ended December 31
($ millions, except employees) 2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
Salaries, benefits and
other employee-related costs 1,688.7 1,612.8 4.7 %
Other operations expenses 1,331.8 1,418.6 (6.1)%
--------------------------------------------------------------------------------------------------------------------------------
Operations expense 3,020.5 3,031.4 (0.4)%
Restructuring and workforce reduction costs 61.6 53.9 14.3 %
--------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,082.1 3,085.3 (0.1)%
================================================================================================================================
Total employees at end of period (1) 24,228 22,888 5.9 %
--------------------------------------------------------------------------------------------------------------------------------
(1) The number of employees in TELUS' international call centres was approximately
4,890 on December 31, 2006 and 3,320 on December 31, 2005.
--------------------------------------------------------------------------------------------------------------------------------
Total operating expenses decreased by $3.2 million 2006, when compared with
2005. Operations expenses, excluding labour disruption impacts in 2005,
increased by approximately $122 million due primarily to increased advertising
and promotion activity and cost of sales for higher subscriber loadings for
Internet services. Network support and maintenance activities increased due to
the use of contractors in the first quarter, facilitating clearance of backlogs
and freeing up TELUS staff to improve customer service. Quality-of-service
metrics defined by the CRTC improved during 2006. Excluding employment at
international call centres, the number of employees at December 31, 2006
decreased by approximately 230, when compared to one year earlier.
* Salaries, benefits and employee-related expenses increased by
$75.9 million in 2006 when compared with 2005. The increase was mainly a
result of lower net expenses recorded in 2005 because of the labour
disruption that lasted from late July to late November.
* Other operations expenses decreased by $86.8 million in 2006 when
compared with 2005, mainly due to the absence of labour disruption
expenses in 2006. Labour disruption expenses in 2005 included third-party
security and contractors. Aside from labour disruption impacts in 2005,
other operations expenses increased when compared with 2005 due to: (i)
advertising and promotions increases primarily for high-speed Internet
offers and business advertising; (ii) increased product cost of sales
consistent with increased high-speed Internet additions and business
equipment sales (iii) increased expenses for outsourcing of non-core
functions; (iv) increased facilities, transit and termination costs due
to increased service demand and traffic volumes; and (v) increased
network support and maintenance costs as a result of increased network
elements to support new products and services and growth; net of (vi)
reduced expenses for higher capitalization of labour associated with 2006
capital programs.
* Restructuring and work force reduction costs applicable to the wireline
segment increased by $7.7 million in 2006, when compared with 2005.
Total expenses discussed above included non-ILEC expenses of $624.5 million
and $610.4 million, respectively, in 2006 and 2005, an increase of 2.3%.
Expense increases supporting the 4.0% growth in revenue included higher
salaries, benefits and employee-related costs, and increased contract and
consulting expenses, as well as higher facilities, transit and termination
costs to support increased data and voice services. These increases were party
offset by a lower cost of sales related to lower equipment sales revenue.
EBITDA and EBITDA margin - wireline segment Years ended December 31
2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
EBITDA ($ millions) 1,839.3 1,852.3 (0.7)%
EBITDA margin (%) 37.4 37.5 (0.1) pts
--------------------------------------------------------------------------------------------------------------------------------
Wireline segment EBITDA decreased by $13.0 million in 2006 when compared with
2005. The decrease was net of an $11.2 million improvement in non-ILEC EBITDA
in 2006 when compared to 2005. Excluding labour disruption impacts, total
wireline EBITDA decreased by approximately $146 million in 2006 when compared
to 2005. The decrease was due mainly to increased competition for local
services and continued long distance revenue erosion, as well as an increase
in advertising, promotions and cost of sales. For the full year, the increased
network support and maintenance costs, and increased restructuring charges
contributed to reduce EBITDA.
5.5 Wireless segment results
Operating revenues - wireless segment Years ended December 31
($ millions) 2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
Network revenue 3,605.5 3,064.6 17.6 %
Equipment revenue 252.4 230.9 9.3 %
--------------------------------------------------------------------------------------------------------------------------------
External operating revenue 3,857.9 3,295.5 17.1 %
Intersegment revenue 23.4 23.5 (0.4)%
--------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 3,881.3 3,319.0 16.9 %
--------------------------------------------------------------------------------------------------------------------------------
Key operating indicators - wireless segment
(000s) As at December 31
2006 2005 Change
---------------------------------------------------------------------------------------------------------------------------------
Subscribers - postpaid 4,078.6 3,666.8 11.2 %
Subscribers - prepaid 977.3 853.9 14.5 %
---------------------------------------------------------------------------------------------------------------------------------
Subscribers - total(1) 5,055.9 4,520.7 11.8 %
Digital POPs(2) covered including
roaming/resale (millions)(3) 31.0 30.6 1.3 %
Years ended December 31
(000s) 2006 2005 Change
---------------------------------------------------------------------------------------------------------------------------------
Subscriber gross additions - postpaid 837.5 870.3 (3.8)%
Subscriber gross additions - prepaid 455.5 408.7 11.5 %
---------------------------------------------------------------------------------------------------------------------------------
Subscriber gross additions - total 1,293.0 1,279.0 1.1 %
Subscriber net additions - postpaid 411.8 426.5 (3.4)%
Subscriber net additions - prepaid 123.4 157.8 (21.8)%
---------------------------------------------------------------------------------------------------------------------------------
Subscriber net additions - total 535.2 584.3 (8.4)%
Churn, per month (%)(4)(5) 1.33 1.39 (0.06) pts
COA(6) per gross subscriber addition ($)(4) 412 386 6.7 %
ARPU ($)(4) 63.46 61.51 3.2 %
Average minutes of use
per subscriber per month (MOU) 403 399 1.0 %
EBITDA to network revenue (%) 48.6 47.1 1.5 pts
Retention spend to network revenue (4) (%) 6.7 6.0 0.7 pts
EBITDA ($ millions) 1,751.0 1,443.0 21.3 %
EBITDA excluding COA ($ millions)(4) 2,283.6 1,937.3 17.9 %
=================================================================================================================================
pts - percentage points
(1) Subscribers are measured at the end of the reporting period based on
information from billing systems.
(2) POPs is an abbreviation for population. A POP refers to one person living
in a population area, which in whole or substantial part is included in
the coverage areas.
(3) At December 31, 2006, TELUS' wireless PCS digital population coverage
included expanded coverage of approximately 7.5 million PCS POPs due to
roaming/resale agreements principally with Bell Canada.
(4) See Section 11.3 Definition of key operating indicators. These are
industry measures useful in assessing operating performance of a wireless
company, but are not defined under accounting principles generally
accepted in Canada and the U.S.
(5) A change in business policy early in 2006, requiring postpaid
customers to provide 30 days notice prior to deactivation, resulted in a
one-time deferral of approximately 4,800 deactivations. Excluding this
one-time positive impact, the churn rate was 1.34% in 2006.
(6) Cost of acquisition.
--------------------------------------------------------------------------------------------------------------------------------
Wireless segment revenues increased by $562.3 million in 2006 when compared
with 2005, due to the following:
* Network revenue increased by $540.9 million in 2006, when compared to
2005, as a result of the 11.8% expansion of the subscriber base combined
with increased average revenue per subscriber unit per month. ARPU
increased by $1.95 in 2006, when compared to 2005, principally due to
increased data usage and higher voice minutes of use per subscriber per
month (MOU). ARPU has increased for four consecutive years.
Data revenues in 2006 increased to 7.8% of Network revenue, or
$279.9 million, as compared with 4.3% of Network revenue, or
$130.6 million, in 2005 - reflecting a growth rate of 114.3%. Data ARPU
increased by 88.8% to $4.89 in 2006 when compared with $2.59 in 2005.
This growth was principally related to text messaging, PDA devices,
mobile computing, Internet browser activities and pay-per-use downloads
such as ringtones, music, games and videos.
At December 31, 2006, postpaid subscribers represented 80.7% of the total
cumulative subscriber base, remaining relatively stable from one year
earlier. Postpaid subscriber net additions improved to 76.9% of all net
additions when compared with 73.0% of all net additions for the same
period in 2005.
The blended churn rate in 2006 was 1.33% as compared with 1.39% in 2005.
The postpaid monthly churn rate for 2006 was less than one per cent, an
improvement from 2005, while the prepaid churn rate increased slightly in
2006 when compared with 2005. Total deactivations were 757,800 in 2006 as
compared to 694,700 in 2005, which primarily reflects the growing
subscriber base. The improved churn and favourable subscriber net
addition mix reflect the continued focus on profitable subscriber growth
and retention.
* Equipment sales, rental and service revenue increased by $21.5 million
in 2006, when compared to 2005. The increase was due mainly to continued
subscriber growth and increased retention activity. Gross subscriber
additions were 1,293,000 in 2006 as compared with 1,279,000 in 2005.
Handset revenues associated with gross subscriber activations are
included in COA per gross subscriber addition, while handset revenues
associated with retention efforts are included in the overall retention
spend amount.
* Intersegment revenues represent services provided by the wireless
segment to the wireline segment and are eliminated upon consolidation
along with the associated expense in the wireline segment.
Operating expenses - wireless segment Years ended December 31
($ millions, except employees) 2006 2005 Change
---------------------------------------------------------------------------------------------------------------------------------
Equipment sales expenses 574.9 478.9 20.0 %
Network operating expenses 451.2 392.2 15.0 %
Marketing expenses 422.5 403.7 4.7 %
General and administration expenses 675.5 601.2 12.4 %
--------------------------------------------------------------------------------------------------------------------------------
Operations expense 2,124.1 1,876.0 13.2 %
Restructuring and workforce reduction costs 6.2 -- n.m.
--------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,130.3 1,876.0 13.6 %
=================================================================================================================================
Total employees at end of period 7,727 6,931 11.5 %
--------------------------------------------------------------------------------------------------------------------------------
Wireless segment total operating expenses increased by $254.3 million in 2006,
when compared with 2005, to promote, retain and support the 11.8% growth in
the subscriber base and increase in Network revenue.
* Equipment sales expenses increased by $96.0 million in 2006, when
compared to 2005, due principally to an increase in gross subscriber
activations, higher handset costs related to product mix, and increased
retention activity. Handset costs associated with gross subscriber
activations are included in COA per gross subscriber addition. Handset
costs related to retention efforts, ahead of the implementation of
wireless number portability (WNP) in early 2007, are included in the
overall retention spend amount.
* Network operating expenses increased by $59.0 million in 2006, when
compared to 2005. The increase was principally due to higher roaming
volumes combined with transmission and site-related expenses to support
the greater number of cell sites, a larger subscriber base, third-party
data content providers, and improved network quality and coverage.
Moreover, network operating expenses in 2005 included competitive digital
network services discounts arising from CRTC Decision 2005-6 as well as a
$5.3 million credit related to years 2003 to 2005, which reflected the
December 6, 2005 Federal Court ruling that TELUS should not be required
to include wireless revenues in the calculation of telecommunications
fees payable to the CRTC.
* Marketing expenses increased by $18.8 million in 2006 when compared
with 2005. COA per gross subscriber addition increased by $26 in 2006
when compared with 2005, principally due to higher subsidies on certain
popular handsets driven by competitive activity, increased dealer
compensation costs related to the higher gross subscriber additions, and
higher advertising and promotion spending related to new product
launches. In 2006, lifetime revenue per subscriber increased by $346 to
$4,771. COA as a percentage of lifetime revenue was 8.6% in 2006,
representing a record low for TELUS and reflecting continued execution of
its profitable growth strategy.
* General and administration expenses increased by $74.3 million in 2006,
when compared to 2005, due principally to the increase in employees to
support the significant growth in the subscriber base and continued
expansion of the client care team and Company-owned retail stores.
Moreover, occupancy and client-related costs were higher as well as bad
debts expense related to increased write-offs.
* Restructuring and workforce reduction costs were related to staff
reductions associated with the integration of the wireline and wireless
operations.
EBITDA and EBITDA margin -
wireless segment Years ended December 31
2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
EBITDA ($ millions) 1,751.0 1,443.0 21.3 %
EBITDA margin (%) 45.1 43.5 1.6 pts
--------------------------------------------------------------------------------------------------------------------------------
Wireless segment EBITDA increased by $308.0 million in 2006, when compared to
2005, as a result of the strong revenue growth, partially offset by higher COA
per gross subscriber addition, increased retention investment ahead of the
implementation of wireless number portability in 2007 and increased operations
expense to support growth. The EBITDA margin, when calculated as a percentage
of Network revenue, was a TELUS record at 48.6% in 2006 (47.1% in 2005).
6. Financial condition
The following are the significant changes in the Consolidated balance sheets
in the year ended December 31, 2006.
Dec. 31, Dec. 31, Change % Change Explanation of the change in balance
($ millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Current Assets The balance of cash and temporary investments
Cash and temporary (11.5) 8.6 (20.1) n.m. at December 31, 2006 represents net cheques in
investments, net circulation and overdrafts after deduction of
cash balances. See Section 7: Liquidity and
capital resources
Short-term investments 110.2 -- 110.2 n.m. Investments of surplus cash
Accounts receivable 707.2 610.3 96.9 15.9 % Primarily growth in the wireless business and
accrued inducements for renegotiated leases
Income and other taxes 95.4 103.7 (8.3) (8.0)% Refunds of $127 million including interest we
receivable received, net of an increase for recent
reassessments and investment tax credit
accruals
Inventories 196.4 138.8 57.6 41.5 % An increase in wireless handset inventories due
to the introduction of several new handsets and
lower than anticipated gross subscriber
additions in the fourth quarter
Prepaid expenses and other 195.3 154.7 40.6 26.2 % Includes the deferred loss on termination
and replacement of cross currency interest
rate swaps, prepaid licences and insurance
Deferred hedging asset 40.4 -- 40.4 n.m. New hedges entered into for 2007 U.S. dollar
Notes had favourable exchange rates compared
to the rate at the balance sheet date. See Note
17(b) of the Consolidated financial statements
Current portion of future -- 226.4 (226.4) (100.0)% Refer to current liabilities section below
income taxes
--------------------------------------------------------------------------------------------------------------------------------
Current Liabilities 1,363.6 1,393.7 (30.1) (2.2)% Primarily reduced payroll and employee-related
Accounts payable and liabilities
accrued liabilities
Income and other taxes payable 10.3 -- 10.3 n.m. Provincial capital taxes and foreign income
taxes payable over the next 12 months
Restructuring and workforce 53.1 57.1 (4.0) (7.0)% Payments under previous and current programs
reduction accounts payable andexceeded new obligations
accrued liabilities
Advance billings and customer 606.3 571.8 34.5 6.0% Increased billings, price cap deferred revenue
deposits and activation and connection fees
Current maturities of long-term 1,434.4 5.0 1,429.4 n.m. Includes $70 million of 7.1% TCI medium-term
debt Notes maturing in February 2007 and $1,359
million of 7.5% TELUS Corporation U.S. dollar
Notes due June 2007
Current portion of deferred 165.8 -- 165.8 n.m. Reclassified from long-term liabilities for
hedging liability 2007 U.S. dollar Notes
Current portion of future 93.2 -- 93.2 n.m. The tax effect of differences between the
income taxes accounting and tax basis of working capital,
net of losses available for deduction within
the next 12 months
--------------------------------------------------------------------------------------------------------------------------------
Working capital (1) (2,393.3) (785.1) (1,608.2) n.m. Includes an increase in the current portions
of long-term debt - see Section 9.3 Financing
plan for 2007
--------------------------------------------------------------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they fall due.
-------------------------------------------------------------------------------------------------------------------------------
Table continued from the previous page.
--------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Dec. 31, Change Change Explanation of the change in balance
($ millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net 10,982.1 10,941.5 40.6 0.4 % See Sections 5.3 Consolidated results from
operations - Depreciation and amortization and
7.2 Cash used by investing activities - Capital
expenditures
--------------------------------------------------------------------------------------------------------------------------------
Other Assets
Deferred charges 976.5 850.2 126.3 14.9 % Primarily pension plan contributions in excess
of charges to income
Investments 35.2 31.2 4.0 12.8 % New investments net of divestitures
Goodwill 3,169.5 3,156.9 12.6 0.4 % The acquisition of FSC Internet Corp. and an
increase in economic interest in Ambergris
(international call centre operations) to 97.4%
partly offset by a reclassification of goodwill
to a reduction of the current future income tax
liability for a change in estimate of available
tax losses for prior years
--------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 3,493.7 4,639.9 (1,146.2) (24.7)% Primarily a reclassification to current
maturities of TCI medium-term Notes maturing in
February 2007 and TELUS Corporation U.S. dollar
Notes due June 2007, partly offset by the public
issue in May 2006 of $300 million 5.00%, Series
CB Notes
--------------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities 1,257.3 1,635.3 (378.0) (23.1)% Primarily a reduction in the deferred hedging
liability through:
* Replacement of previous cross currency
interest rate swap agreements associated with
2007 (U.S. dollar) Notes with a like amount
of new cross currency interest rate swap
agreements, which have a lower effective
fixed interest rate and a lower effective
fixed exchange rate. See Note 17(b) of the
Consolidated financial statements; and
* Reclassification of $165.8 million to current
liabilities;
partly offset by deferred lease inducements
from renegotiated building leases
--------------------------------------------------------------------------------------------------------------------------------
Future Income Taxes 1,067.3 1,023.9 43.4 4.2 % An increase in temporary differences for long-
term assets and liabilities net of a
revaluation of liabilities at lower enacted
future income tax rates
---------------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interests 23.6 25.6 (2.0) (7.8)% --
--------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common equity 6,928.1 6,870.0 58.1 0.8 % Increased primarily from:
* Net income in 2006 of $1,122.5 million; and
* An increase of $118.5 million in Common Share
and Non-Voting Share capital for the exercise
of options;
partly offset by:
* Normal course issuer bid expenditures of
$800.2 million; and
* Dividends of $411.7 million
--------------------------------------------------------------------------------------------------------------------------------
7. Liquidity and capital resources
7.1 Cash provided by operating activities
--------------------------------------------------------------------------------------------------------------------------------
($ millions) Years ended December 31
2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
2,803.7 2,914.6 (3.8)%
--------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities decreased by $110.9 million in 2006,
when compared with 2005. The decrease was primarily due to the following:
* Proceeds from securitized accounts receivable were unchanged in 2006
compared with an increase of $350 million in 2005;
* Short-term investments increased by $110.2 million;
* Employer contributions to employee defined benefits plans were
$123.3 million in 2006, an increase of $4.5 million, when compared with
2005. The best estimate of fiscal 2007 employer contributions to the
Company's defined benefit pension plans is approximately $111 million;
* Interest received decreased by $23.1 million in 2006, when compared to
2005, due primarily to lower cash balances in 2006; and
* Other changes in non-cash working capital.
The above decreases were partly offset by the following:
* EBITDA increased by $295.0 million in 2006 when compared to 2005, as
described in Section 5: Results from operations;
* Income taxes received net of installment payments increased by
$28.8 million in 2006, when compared to 2005, due mainly to collection of
income taxes receivable during 2006; and
* Interest paid decreased by $122.2 million in 2006, when compared to
2005. The decrease was due mainly to the early redemption of notes on
December 1, 2005. Interest paid in 2006 included a $31.2 million payment
in respect of the termination of cross currency interest rate swaps, as
well as a partial payment of previously accrued interest in respect of a
court decision in a lawsuit over a BC TEL bond redemption matter dating
back to 1997.
[graphs - cash provided by operating activities; cash used by investing
activities]
7.2 Cash used by investing activities
--------------------------------------------------------------------------------------------------------------------------------
($ millions) Years ended December 31
2006 2005 Change
---------------------------------------------------------------------------------------------------------------------------------
1,675.2 1,355.2 23.6 %
--------------------------------------------------------------------------------------------------------------------------------
Cash used by investing activities increased by $320.0 million in 2006, when
compared with 2005, due primarily to greater capital expenditures. Funds used
for small acquisitions increased $19.6 million in 2006, when compared with
2005. Assets under construction increased to $725.4 million at December 31,
2006, compared with $516.4 million at December 31, 2005, due to capitalized
costs related to development of a new wireline billing system as well as
in-progress costs for TELUS TV and network enhancement.
--------------------------------------------------------------------------------------------------------------------------------
Capital expenditures Years ended December 31
($ in millions, except capital expenditure intensity) 2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
Wireline segment 1,191.0 914.2 30.3 %
Wireless segment 427.4 404.8 5.6 %
--------------------------------------------------------------------------------------------------------------------------------
TELUS consolidated 1,618.4 1,319.0 22.7 %
--------------------------------------------------------------------------------------------------------------------------------
Capital expenditure intensity(1) (%) 18.6 16.2 2.4 pts
--------------------------------------------------------------------------------------------------------------------------------
(1) Capital expenditure intensity is measured by dividing capital expenditures by operating revenues.
This measure provides a method of comparing the level of capital expenditures to other companies
of varying size within the same industry.
TELUS' EBITDA less capital expenditures (see Section 11.1 EBITDA for the
calculation) decreased by 0.2% to $1.97 billion as growth in EBITDA largely
offset increased capital expenditures.
* Wireline segment capital expenditures increased by $276.8 million in
2006, when compared to 2005, due primarily to increased ILEC
expenditures, which increased by approximately $272 million to
$1,071 million in 2006. The increased ILEC spending was directed
primarily to investments in the broadband networks in B.C., Alberta and
Quebec, network access growth to serve strong housing growth in B.C. and
Alberta, TELUS TV and service development. To a lesser extent, there was
a deferral of activity from 2005 to 2006 due to the 2005 labour
disruption. The remaining increases supported non-incumbent operations.
The wireline segment capital expenditure intensity ratio was 24.2% in 2006,
compared with 18.5% in 2005. This increase was caused by reduced capital
expenditures during the 2005 labour disruption as well as higher planned
expenditures levels in 2006. For these reasons, wireline cash flow (EBITDA
less capital expenditures) decreased by approximately 31% to $648.3 million
in 2006, when compared to 2005.
* Wireless segment capital expenditures increased by $22.6 million in
2006, when compared with 2005, due principally to strategic investments
in next generation EVDO-capable higher-speed wireless network technology
and continued enhancement of digital wireless capacity and coverage.
Capital expenditure intensity for the wireless segment was 11.0% in 2006,
as compared with 12.2% in 2005. Wireless cash flow (EBITDA less capital
expenditures) set a TELUS full year record at $1,323.6 million, an
increase of 27.5% from 2005.
7.3 Cash used by financing activities
--------------------------------------------------------------------------------------------------------------------------------
($ millions) Years ended December 31
2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
1,148.6 2,447.3 (53.1)%
--------------------------------------------------------------------------------------------------------------------------------
Cash used by financing activities decreased by $1,298.7 million in 2006, when
compared with 2005. Financing activities included:
* Proceeds from Common Shares and Non-Voting Shares issued were
$104.5 million in 2006, a decrease of $114.9 million when compared to
2005. The decrease was due mainly to a smaller number of options being
exercised in 2006 and implementation of the net equity settlement feature
on May 1, 2006.
* Cash dividends paid to shareholders were $411.7 million in 2006, an
increase of $99.5 million when compared with 2005. The increase was due
to the higher quarterly dividend paid per share, partly offset by lower
average shares outstanding.
* Consistent with its intent to return surplus cash to shareholders, the
Company renewed its NCIB program, which has been in place since December
2004. The renewed program (Program 3) came into effect on December 20,
2006 and is set to expire on December 19, 2007. The maximum number of
shares that may be purchased under Program 3 is 12 million Common Shares
and 12 million Non-Voting Shares. The shares are purchased on the Toronto
Stock Exchange (TSX) and all repurchased shares will be cancelled.
Investors may obtain a copy of the notice filed with the TSX without
charge by contacting TELUS Investor Relations.
The Company repurchased 73% of the maximum shares allowed under the
program that ended December 19, 2006 (Program 2) and 85% of the maximum
shares allowed under the program that ended December 19, 2005 (Program
1).
Normal course issuer bid programs
--------------------------------------------------------------------------------------------------------------------------------
Shares repurchased Purchase cost ($ millions)
--------------------------------------------------------------------------------------------------------------------------------
By fiscal year and program
Charged to Charged to
Common Non-Voting Share capital Retained earnings
Shares Shares Total (1) (2) Paid
--------------------------------------------------------------------------------------------------------------------------------
2004
Program 1 beginning Dec. 20 755,711 1,451,400 2,207,111 39.4 38.6 78.0
--------------------------------------------------------------------------------------------------------------------------------
2005
Program 1 ending Dec. 19 9,503,300 10,048,600 19,551,900 330.1 504.5 834.6
Program 2 beginning Dec. 20 634,469 607,700 1,242,169 20.9 36.6 57.5
--------------------------------------------------------------------------------------------------------------------------------
10,137,769 10,656,300 20,794,069 351.0 541.1 892.1
---------------------------------------------------------------------------------------------------------------------------------
2006
Program 2 ending Dec. 19 5,490,600 10,701,400 16,192,000 297.6 492.8 790.4
Program 3 beginning Dec. 20 -- 186,723 186,723 4.0 5.8 9.8
---------------------------------------------------------------------------------------------------------------------------------
5,490,600 10,888,123 16,378,723 301.6 498.6 800.2
---------------------------------------------------------------------------------------------------------------------------------
Totals
Program 1 10,259,011 11,500,000 21,759,011 369.5 543.1 912.6
Program 2 6,125,069 11,309,100 17,434,169 318.5 529.4 847.9
Program 3 -- 186,723 186,723 4.0 5.8 9.8
---------------------------------------------------------------------------------------------------------------------------------
Cumulative 16,384,080 22,995,823 39,379,903 692.0 1,078.3 1,770.3
=================================================================================================================================
(1) Represents the book value of shares repurchased.
(2) Represents the cost in excess of the book value of shares repurchased.
* Long-term debt issues in 2006 included the May 2006 public issue of
$300 million 5.00%, Series CB Notes at a price of $998.80 per $1,000.00
of principal, which mature in 2013. See Note 17(b) of the Consolidated
financial statements. The net proceeds of the offering were used to
terminate cross currency swap agreements. The remaining debt issues in
2006 were mainly periodic draws on the TELUS Corporation credit
facilities, which were offset by periodic repayments of the credit
facilities. On December 1, 2005, $1.578 billion of Canadian dollar
Notes were redeemed early. On a net basis, the amount drawn from credit
facilities at December 31, 2006 decreased by $21 million since
December 31, 2005.
* A partial payment of $309.4 million of the deferred hedging liability
was completed in the second quarter of 2006. In contemplation of the
planned refinancing of the 2007 U.S. dollar Notes, in May 2006, the
Company replaced approximately 63% of the notional value of the existing
cross currency interest rate swap agreements with a like amount of new
cross currency interest rate swap agreements, which have a lower
effective fixed interest rate and a lower effective fixed exchange rate.
This replacement happened concurrent with the issuance of the 2013
Canadian dollar Notes; the two transactions had the composite effect of
deferring, from June 2007 to June 2013, the payment of $300 million,
representing a portion of the amount that would have been due either
under the cross currency interest rate swap agreements or to the 2007
U.S. dollar Note holders (to whom the amounts would ultimately have
been paid would depend upon changes in interest and foreign exchange
rates over the period to maturity of the underlying debt).
[graphs - debt reduction, net; cash returned to shareholders]
7.4 Liquidity and capital resource measures
As at, or years ended, December 31 2006 2005 Change
--------------------------------------------------------------------------------------------------------------------------------
COMPONENTS OF DEBT AND COVERAGE RATIOS (1)
($ millions)
Net debt (including securitized accounts receivables) 6,278.1 6,294.4 (16.3)
Total capitalization - book value 13,229.8 13,190.0 39.8
EBITDA excluding restructuring and workforce
reduction costs 3,658.1 3,349.2 308.9
Net interest cost 504.7 623.1 (118.4)
DEBT RATIOS
Fixed-rate debt as a proportion of total
indebtedness (%) 90.6 89.8 0.8 pts
Average term to maturity of debt (years) 4.5 5.4 (0.9)
Net debt to total capitalization (%) (1) 47.5 47.7 (0.2) pts
Net debt to EBITDA (1) (3) 1.7 1.9 (0.2)
COVERAGE OF RATIOS (1)
Interest coverage on long-term debt 3.9 2.5 1.4
EBITDA (3) interest coverage 7.2 5.4 1.8
OTHER MEASUIRES
Free cash flow ($ millions) (2) 1,600.4 1,465.5 134.9
Dividend payout ratio (%) (1) 46 56 (10) pts
--------------------------------------------------------------------------------------------------------------------------------
(1) See Section 11.4 Definition of liquidity and capital resource measures.
(2) See Section 11.2 Free cash flow.
(3) EBITDA excluding restructuring.
--------------------------------------------------------------------------------------------------------------------------------
TELUS revised the definition of net debt to include securitized accounts
receivable to be more consistent with the practice of credit rating agencies.
Total capitalization increased from higher common equity (mainly increased
retained earnings net of lower share capital). The net debt to EBITDA ratio
measured at December 31, 2006 improved primarily as a result of higher EBITDA.
The average term to maturity of debt is now less than five years as more debt
was redeemed than issued over the course of 2005 and 2006. See Section 9.3
Financing plan for 2007.
Interest coverage on long-term debt improved by 0.9 because of lower interest
expense, and improved by 0.5 because of increased income before taxes and
interest expense. The EBITDA interest coverage ratio improved by 1.3 due to
lower net interest cost and improved by 0.5 due to higher EBITDA (excluding
restructuring). The free cash flow measure improved for the year ended
December 31, 2006 primarily because increased EBITDA and lower interest paid
were partly offset by increased capital expenditures. The dividend payout
ratio for December 31, 2006 was near the low end of the target guideline of 45
to 55% for sustainable net earnings due mainly to the inclusion in actual
earnings of positive impacts from 2006 tax rate changes and tax recoveries.
The dividend payout ratio was about 54% when calculated excluding these 2006
income tax items. The dividend payout ratio for December 31, 2005 was higher
than the target guideline due primarily to the inclusion in actual earnings of
after-tax labour disruption expenses.
During 2006, the Company's strategy, which was unchanged from 2005, was to
maintain the liquidity measures set out below. The Company believes that these
liquidity measure targets are currently at the optimal level and provide
access to capital at a reasonable cost by maintaining credit ratings in the
range of BBB+ to A-, or the equivalent.
Long-term guidelines for certain of TELUS' liquidity measures as defined in
Section 11.4 Definition of liquidity and capital resource measures are:
* Net debt to total capitalization of 45 to 50%;
* Net debt to EBITDA of 1.5 to 2.0 times; and
* Dividend payout ratio of 45 to 55% of sustainable net earnings.
[graphs - net debt to total capitalization; net debt to EBITDA]
7.5 Credit facilities
TELUS had available liquidity from unutilized credit facilities of more than
$1.4 billion at December 31, 2006.
Credit facilities Outstanding
At December 31, 2006 undrawn letters
($ in millions) Expiry Size Drawn of credit
---------------------------------------------------------------------------------------------------------------------------------
Five-year revolving facility (1) May 4, 2010 800.0 -- --
Three-year revolving facility (1) May 7, 2008 800.0 120.0 100.1
Other bank facilities -- 74.0 1.2 2.6
---------------------------------------------------------------------------------------------------------------------------------
Total -- 1,674.0 121.2 102.7
=================================================================================================================================
(1) Canadian dollars or U.S. dollar equivalent.
---------------------------------------------------------------------------------------------------------------------------------
TELUS' credit facilities contain customary covenants including a requirement
that TELUS not permit its consolidated Leverage Ratio (Funded Debt to trailing
12-month EBITDA) to exceed 4.0:1 (approximately 1.7:1 at December 31, 2006)
and not permit its consolidated Coverage Ratio (EBITDA to Interest Expense on
a trailing 12-month basis) to be less than 2.0:1 (approximately 7.4:1 at
December 31, 2006) at the end of any financial quarter. There are certain
minor differences in the calculation of the Leverage Ratio and Coverage Ratio
under the credit agreement as compared with the calculation of Net debt to
EBITDA and EBITDA interest coverage. Historically, the calculations have not
been materially different. The covenants are not impacted by revaluation of
capital assets, intangible assets and goodwill for accounting purposes.
Continued access to TELUS' credit facilities is not contingent on the
maintenance by TELUS of a specific credit rating.
TELUS has received commitments from a syndicate of 18 financial institutions
that are expected to result in a new $2 billion credit facility being
established, subject to completion of documentation and normal conditions
precedent. This new facility would replace the $1.6 billion of existing credit
facilities. The new credit facility is expected to have more favourable terms
and mature in 2012. The use of proceeds is for general corporate purposes, and
proceeds may be used to back up commercial paper issuance.
7.6 Accounts receivable sale
On July 26, 2002, TCI, a wholly owned subsidiary of TELUS, entered into an
agreement, which was amended September 30, 2002, March 1, 2006, and November
30, 2006, with an arm's-length securitization trust under which TCI is able to
sell an interest in certain of its trade receivables up to a maximum of
$650 million. As a result of selling the interest in certain of the trade
receivables on a fully serviced basis, a servicing liability is recognized on
the date of sale and is, in turn, amortized to earnings over the expected life
of the trade receivables. This revolving-period securitization agreement had
an initial term ending July 18, 2007; the November 30, 2006 amendment resulted
in the term being extended to July 18, 2008.
TCI is required to maintain at least a BBB (low) credit rating by Dominion
Bond Rating Service Limited (DBRS) or the securitization trust may require the
sale program to be wound down. The necessary credit rating was exceeded by
three levels at A (low) as of February 14, 2007. The balance of proceeds from
securitized receivables varied between $325 million and $535 million during
2006, closing at $500 million on December 31, 2006. Balances in 2005 were
$150 million from January 1 to November 29 (the minimum necessary to keep this
program active), and $500 million for the rest of the year.
7.7 Credit ratings
As of February 14, 2007 TELUS and TCI investment grade credit ratings were
unchanged from those reported in TELUS' 2005 annual Management's discussion
and analysis in Section 7.7. However, in November 2006, Moody's Investors
Service affirmed its rating of Baa2 and placed TELUS under review for possible
upgrade. TELUS has an objective to preserve access to capital markets at a
reasonable cost by maintaining and improving investment grade credit ratings
in the range of BBB+ to A- or the equivalent.
Credit rating summary DBRS(1) S&P(1) Moody's(2) Fitch(1)
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation
Senior bank debt -- -- -- BBB+
Notes BBB (high) BBB+ Baa2 BBB+
TELUS Communications Inc.
Debentures A (low) BBB+ -- BBB+
Medium-term Notes A (low) BBB+ -- BBB+
First mortgage bonds A (low) A- -- --
---------------------------------------------------------------------------------------------------------------------------------
(1) Outlook or trend stable.
(2) Under review for possible upgrade.
---------------------------------------------------------------------------------------------------------------------------------
7.8 Off-balance sheet arrangements, commitments and contingent liabilities
Financial instruments (Note 5 of the Consolidated financial statements)
The Company's financial instruments consist of cash and temporary investments,
accounts receivable, investments accounted for using the cost method, accounts
payable, restructuring and workforce reduction accounts payable, short-term
obligations, long-term debt, interest rate swap agreements, share-based
compensation cost hedges and foreign exchange hedges.
The Company uses various financial instruments, the fair values of some of
which are not reflected on the balance sheets, to reduce or eliminate exposure
to interest rate and foreign currency risks and to reduce or eliminate
exposure to increases in the compensation cost arising from specified grants
of restricted stock units and cash settled options; effective January 1, 2007,
the fair values of all such financial instruments will be reflected on the
balance sheets. These instruments are accounted for on the same basis as the
underlying exposure being hedged. The majority of the notional value of these
instruments was added during 2001 and pertains to TELUS' U.S. dollar
borrowing. During the second quarter of 2006, the Company terminated a number
of cross currency interest rate swap agreements and entered into new cross
currency interest rate swap agreements in respect of the Company's U.S. dollar
Notes maturing in June 2007.
Use of these instruments is subject to a policy, which requires that no
derivative transaction be entered into for the purpose of establishing a
speculative or a levered position, and sets criteria for the creditworthiness
of the transaction counterparties.
Price risk
Interest rates: the Company is exposed to interest rate risk arising from
fluctuations in interest rates on its temporary investments, short-term
obligations and long-term debt. In contemplation of the planned refinancing of
the debt maturing June 1, 2007, the Company has entered into forward starting
interest rate swap agreements that, as at December 31, 2006, have the effect
of fixing the underlying interest rate on up to $500 million of replacement
debt. Hedge accounting has been applied to these forward starting interest
rate swap agreements.
Currency: the Company is exposed to currency risks arising from fluctuations
in foreign exchange rates on its U.S. dollar denominated long-term debt.
Currency hedging relationships have been established for the related
semi-annual interest payments and principal payments at maturity.
The Company's foreign exchange risk management also includes the use of
foreign currency forward contracts to fix the exchange rates on short-term
foreign currency transactions and commitments. Hedge accounting is applied to
these short-term foreign currency forward contracts on an exception basis
only.
As at December 31, 2006, the Company had entered into foreign currency forward
contracts that have the effect of fixing the exchange rates on U.S. $13
million of fiscal 2007 purchase commitments; hedge accounting has been applied
to these foreign currency forward contracts, all of which relate to the
wireless segment.
Other: the Company is exposed to a market risk with respect to its short-term
investments in that the fair value will fluctuate because of changes in market
prices.
Credit risk
The Company is exposed to credit risk with respect to its short-term deposits,
accounts receivable, interest rate swap agreements and foreign exchange
hedges. Credit risk associated with short-term deposits is minimized
substantially by ensuring that these financial assets are placed with
governments, well-capitalized financial institutions and other creditworthy
counterparties. An ongoing review is performed to evaluate changes in the
status of counterparties.
Credit risk associated with accounts receivable is minimized by the Company's
large customer base, which covers substantially all consumer and business
sectors in Canada. The Company follows a program of credit evaluations of
customers and limits the amount of credit extended when deemed necessary. The
Company maintains provisions for potential credit losses, and any such losses
to date have been within management's expectations.
Counterparties to the Company's interest rate swap agreements, foreign
exchange hedges and share-based compensation cost hedges are major financial
institutions that have all been accorded investment grade ratings by a primary
rating agency. The dollar amount of credit exposure under contracts with any
one financial institution is limited and counterparties' credit ratings are
monitored. The Company does not give or receive collateral on swap agreements
and hedges due to its credit rating and those of its counterparties. While the
Company is exposed to credit losses due to the non-performance of its
counterparties, the Company considers the risk of this remote; if all
counterparties were not to perform, the pre-tax effect would be limited to the
value of any deferred hedging assets.
Fair value
The carrying value of cash and temporary investments, accounts receivable,
accounts payable, restructuring and workforce reduction accounts payable and
short-term obligations approximates their fair values due to the immediate or
short-term maturity of these financial instruments. The carrying values of the
Company's investments accounted for using the cost method would not exceed
their fair values.
The fair values of the Company's long-term debt are estimated based on quoted
market prices for the same or similar issues or on the current rates offered
to the Company for debt of the same maturity as well as the use of discounted
future cash flows using current rates for similar financial instruments
subject to similar risks and maturities. The fair values of the Company's
derivative financial instruments used to manage exposure to interest rate and
currency risks are estimated similarly.
As at December 31 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
($ millions) Hedging
item
maximum
maturity Carrying Carrying
date amount Fair value amount Fair value
--------------------------------------------------------------------------------------------------------------------------------
Liabilities
Long-term debt
Principal 4,928.1 5,535.9 4,644.9 5,371.6
Derivatives(1)(2) used to manage interest
rate and currency risks associated with
U.S. dollar denominated debt
- Deferred hedging asset (40.4) --
- Deferred hedging liability
- Current 165.8 --
- Non-current 710.3 1,154.3
---------------------------------------------------------------------------------------------------------------------------------
835.7 1,154.3
- Interest payable 6.3 9.7
---------------------------------------------------------------------------------------------------------------------------------
Net June 2011 842.0 1,090.6 1,164.0 1,470.5
Derivatives(1)(2) used to manage
interest rate risk associated with
planned refinancing of debt maturing
June 1, 2007 June 2007 -- 6.5 -- --
---------------------------------------------------------------------------------------------------------------------------------
5,770.1 6,633.0 5,808.9 6,842.1
=================================================================================================================================
(1) Notional amount of all derivative financial instruments outstanding is
$5,138.6 (2005 - $4,904.8).
(2) Designated as cash flow hedging items.
Commitments and contingent liabilities (Note 19 of the Consolidated
financial statements)
The Company has a $53.1 million liability recorded for outstanding commitments
under its restructuring programs as at December 31, 2006. In addition, the
Company disclosed in its targets for 2007 that it expected to record
approximately $50 million of restructuring and employee reduction costs in
2007. See Forward-looking statements at the beginning of Management's
discussion and analysis.
Price cap deferral accounts
On May 30, 2002, and on July 31, 2002, the CRTC issued Decisions 2002-34 and
2002-43, respectively, and introduced the concept of a deferral account. The
Company must make significant estimates and assumptions in respect of the
deferral accounts given the complexity and interpretation required of
Decisions 2002-34 and 2002-43. Accordingly, the Company estimates, and
records, an aggregate liability of $164.8 million as at December 31, 2006
(2005 - $158.7 million), to the extent that activities it has undertaken,
other qualifying events and realized rate reductions for Competitor Services
do not extinguish it; management is required to make estimates and assumptions
in respect of the offsetting nature of these items. If the CRTC, upon its
periodic review of the Company's deferral account, disagrees with management's
estimates and assumptions, the CRTC may adjust the deferral account balance
and such adjustment may be material. Ultimately, this process results in the
CRTC determining if, and when, the deferral account liability is settled.
On March 24, 2004, the CRTC issued Telecom Public Notice CRTC 2004-1 Review
and disposition of the deferral accounts for the second price cap period,
which initiated a public proceeding inviting proposals on the disposition of
the amounts accumulated in the incumbent local exchange carriers' deferral
accounts during the first two years of the second price cap period.
On February 16, 2006, the CRTC issued Decision CRTC 2006-9, Disposition of
funds in the deferral account. In its decision, the CRTC determined that the
majority of the accumulated liability within the respective ILEC's deferral
account was to be made available for initiatives to expand broadband services
within their ILEC operating territories to rural and remote communities where
service is currently not available. In addition, a minimum of 5% of the
accumulated deferral account balance must be used for initiatives that enhance
accessibility to telecommunications services for individuals with
disabilities. To the extent that the deferral account balance exceeds the
approved initiatives, the remaining balance will be distributed in the form of
a one-time rebate to local residential service customers in non-high cost
serving areas. Finally, the CRTC indicated that, subsequent to May 31, 2006,
no additional amounts are to be added to the deferral account and, instead,
are to be dealt with via prospective rate reductions.
In September 2006, the Federal Court of Appeal granted the Consumers
Association of Canada and the National Anti-Poverty Organization leave to
appeal CRTC Telecom Decision 2006-9. These consumer groups are expected to
file their appeal over the coming months asking the Court to direct rebates to
local telephone subscribers, rather than have the accumulated deferral account
funds used for purposes determined by the CRTC, as noted above. Bell Canada
was also granted leave to appeal Decision 2006-9 on the grounds that the CRTC
exceeded its jurisdiction to the extent it approves rebates from the deferral
account. These matters are expected to be heard in 2007. In the event that
Bell Canada is successful in its appeal, the Company may realize additional
revenue equal to the amount of the deferral account that would otherwise have
been rebated by the CRTC. Should the consumer groups be successful in their
appeals, the Company may be required to remit a one-time refund of an amount
up to, but not exceeding, the aggregate liability of approximately $165
million in individually small amounts to its entire local residential
subscriber base. As the deferral account balance was fully provided for in
previous financial statements, the potential refund will not impact the
Company's subsequent income from operations. In addition, subject to the
potential outcome of this leave to appeal, the Company may need to re-address
its intent to extend broadband services to uneconomic remote and rural
communities. The Company supports Decision 2006-9 and its designated uses of
the deferral account in order to extend high-speed broadband Internet service
to rural and remote communities and improve telecommunications services for
people with disabilities.
Due to the Company's use of the liability method of accounting for the
deferral account, CRTC Decision 2005-6, as it relates to the Company's
provision of Competitor Digital Network services, is not expected to affect
the Company's consolidated revenues. Specifically, to the extent that CRTC
Decision 2005-6 requires the Company to provide discounts on Competitor
Digital Network services, through May 31, 2006, the Company drew down the
deferral account by an offsetting amount; subsequent to May 31, 2006, the
income statement effects did not change and the Company no longer needed to
account for these amounts through the deferral account. For the year ended
December 31, 2006, the Company drew down the deferral account by $19.9 million
(2005 - $50.5 million) in respect of discounts on Competitor Digital Network
services.
On November 30, 2006, the CRTC issued Telecom Public Notice CRTC 2006-15,
Review of proposals to dispose of the funds accumulated in the deferral
accounts, which initiated a public proceeding to consider the proposals
submitted by the incumbent local exchange carriers to dispose of the funds
accumulated in their respective deferral accounts. The Company expects the
CRTC to render its decision in this matter in the latter part of 2007.
Contractual obligations
The Company's known contractual obligations at December 31, 2006, are
quantified in the following table. Interest obligations are not included in
the table.
--------------------------------------------------------------------------------------------------------------------------------
Long-term debt maturities
-------------------------------
All except Other long-term Operating Purchase
($ millions) capital leases Capital leases liabilities leases obligations Total
--------------------------------------------------------------------------------------------------------------------------------
2007 1,555.0 4.0 18.0 197.6 506.6 2,281.2
2008 122.2 2.6 23.1 184.9 127.2 460.0
2009 0.7 0.8 28.2 198.3 73.7 301.7
2010 80.0 1.7 17.6 185.5 30.8 315.6
2011 2,950.5 0.1 17.7 168.3 11.5 3,148.1
Thereafter 1,049.0 -- 150.7 1,202.6 33.8 2,436.1
---------------------------------------------------------------------------------------------------------------------------------
Total 5,757.4 9.2 255.3 2,137.2 783.6 8,942.7
=================================================================================================================================
Guarantees
Canadian GAAP requires the disclosure of certain types of guarantees and their
maximum, undiscounted amounts. The maximum potential payments represent a
worst-case scenario and do not necessarily reflect results expected by the
Company. Guarantees requiring disclosure are those obligations that require
payments contingent on specified types of future events. In the normal course
of its operations, the Company enters into obligations that GAAP may consider
to be guarantees. As defined by Canadian GAAP, guarantees subject to these
disclosure guidelines do not include guarantees that relate to the future
performance of the Company.
In the normal course of operations, the Company may provide indemnification in
conjunction with certain transactions. The term of these indemnification
obligations ranges in duration and often is not explicitly defined. Where
appropriate, an indemnification obligation is recorded as a liability. In many
cases, there is no maximum limit on these indemnification obligations and the
overall maximum amount of the obligations under such indemnification
obligations cannot be reasonably estimated. Other than obligations recorded as
liabilities at the time of the transaction, historically the Company has not
made significant payments under these indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the new owner's increased
directory publication costs if the increased costs were to arise from a change
in the applicable CRTC regulatory requirements. The Company's proportionate
share would be 80% through May 2006, declining to 40% in the next five-year
period and then to 15% in the final five years. As well, should the CRTC take
any action that would result in the owner being prevented from carrying on the
directory business as specified in the agreement, TELUS would indemnify the
owner in respect of any losses that the owner incurred. As at December 31,
2006, the Company has no liability recorded in respect of indemnification
obligations.
Claims and lawsuits
A number of claims and lawsuits seeking damages and other relief are pending
against the Company. It is impossible at this time for the Company to predict
with any certainty the outcome of such litigation. However, management is of
the opinion, based upon legal assessment and information presently available,
that it is unlikely that any liability, to the extent not provided for through
insurance or otherwise, would be material in relation to the Company's
consolidated financial position, other than as disclosed in Note 19(e) of the
Consolidated financial statements and Section 10.9 Litigation and legal
matters.
7.9 Outstanding share information
The following is a summary of the outstanding shares for each class of equity
at December 31, 2006 and at January 31, 2007. In addition, for January 31,
2007 the total number of outstanding and issuable shares is presented assuming
full conversion of options including those shares held in reserve, but not yet
issued.
--------------------------------------------------------------------------------------------------------------------------------
Outstanding shares
(millions of shares)
---------------------------------------------------------------------------------------------------------------------------------
Common Non-Voting Total
Shares Shares shares
--------------------------------------------------------------------------------------------------------------------------------
Common equity
Outstanding shares at December 31, 2006 and
January 31, 2007 178.7 159.2 337.9 (1)
Options outstanding and issuable(2) at January 31, 2007 0.8 18.2 19.0
---------------------------------------------------------------------------------------------------------------------------------
179.5 177.4 356.9
=================================================================================================================================
(1) For the purposes of calculating diluted earnings per share, the number of shares
was 347.4 for the year ended December 31, 2006.
(2) Assuming full conversion and ignoring exercise prices.
--------------------------------------------------------------------------------------------------------------------------------
8. Critical accounting estimates and accounting policy developments
8.1 Critical accounting estimates
TELUS' significant accounting policies are described in Note 1 of the
Consolidated financial statements. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions. Management's estimates and assumptions
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The Company's
critical accounting estimates are described below and are generally discussed
with the Audit Committee each quarter.
General
* Unless otherwise specified in the discussion of the specific critical
accounting estimates, the Company is not aware of trends, commitments,
events or uncertainties that it reasonably expects to materially affect
the methodology or assumptions associated with the critical accounting
estimates, subject to the items identified in the Forward-looking
statements section of this Management's discussion and analysis.
* In the normal course, changes are made to assumptions underlying all
critical accounting estimates to reflect current economic conditions,
updating of historical information used to develop the assumptions and
changes in the Company's debt ratings, where applicable. Unless otherwise
specified in the discussion of the specific critical accounting
estimates, it is expected that no material changes in overall financial
performance and financial statement line items would arise either from
reasonably likely changes in material assumptions underlying the estimate
or from selection of a different estimate from within a valid range of
estimates.
* All critical accounting estimates are uncertain at the time of making
the estimate and affect the following Consolidated income statement line
items: income taxes (except for estimates about goodwill) and Net income.
Similarly, all critical accounting estimates affect the following
Consolidated balance sheet line items: current assets (income and other
taxes receivable); current liabilities (income and other taxes payable);
future income tax liabilities; and shareholders' equity (retained
earnings). Generally, the discussion of each critical accounting estimate
does not differ between the Company's two segments: wireline and
wireless. The critical accounting estimates affect the Consolidated
income statement and Consolidated balance sheet line items as follows:
_______________________________________________________________________________________________________________________________
- Consolidated income | Operating Operating expenses Other
- statement | revenues expense,
- | -------------------------------------------------- net
- | Amortization
- | of intangible
Consolidated - | Operations Depreciation assets
balance sheet - |
_____________________________|__________________________________________________________________________________________________
Accounts receivable X
--------------------------------------------------------------------------------------------------------------------------------
Inventories X
--------------------------------------------------------------------------------------------------------------------------------
Capital assets and goodwill(1) X X
--------------------------------------------------------------------------------------------------------------------------------
Investments X
--------------------------------------------------------------------------------------------------------------------------------
Advance billings and customer deposits X X X X
--------------------------------------------------------------------------------------------------------------------------------
-
Employee defined benefit pension plans X X (2) X (2)
________________________________________________________________________________________________________________________________
(1) Accounting estimate, as applicable to intangible assets with indefinite lives
and goodwill, primarily affects the Company's wireless segment.
(2) Accounting estimate impact due to internal labour capitalization rates.
________________________________________________________________________________________________________________________________
Accounts receivable
General
* The Company considers the business area that gave rise to the accounts
receivable, performs statistical analysis of portfolio delinquency trends
and performs specific account identification when determining its
allowance for doubtful accounts. This information is also used in
conjunction with current market-based rates of borrowing to determine the
fair value of its residual cash flows arising from accounts receivable
securitization. The fair value of the Company's residual cash flows
arising from the accounts receivable securitization is also referred to
as its "retained interest."
* Assumptions underlying the allowance for doubtful accounts include
portfolio delinquency trends and specific account assessments made when
performing specific account identification. Assumptions underlying the
determination of the fair value of residual cash flows arising from
accounts receivable securitization include those developed when
determining the allowance for doubtful accounts as well as the effective
annual discount rate.
* These accounting estimates are in respect of the Accounts receivable
line item on the Company's Consolidated balance sheet comprising
approximately 4% of total assets as at December 31, 2006. If the future
were to adversely differ from management's best estimates of the fair
value of the residual cash flows and the allowance for doubtful accounts,
the Company could experience a bad debt charge in the future. Such a bad
debt charge does not result in a cash outflow.
Key economic assumptions used to determine the fair value of residual cash
flows arising from accounts receivable securitization
* The estimate of the Company's fair value of its retained interest could
materially change from period to period due to the fair value estimate
being a function of the amount of accounts receivable sold, which can
vary on a monthly basis. See Note 13 of the Consolidated financial
statements for further analysis.
The allowance for doubtful accounts
* The estimate of the Company's allowance for doubtful accounts could
materially change from period to period due to the allowance being a
function of the balance and composition of accounts receivable, which can
vary on a month-to-month basis. The variance in the balance of accounts
receivable can arise from a variance in the amount and composition of
operating revenues, from a variance in the amount of accounts receivable
sold to the securitization trust and from variances in accounts
receivable collection performance.
Inventories
The allowance for inventory obsolescence
* The Company determines its allowance for inventory obsolescence based
upon expected inventory turnover, inventory aging, and current and future
expectations with respect to product offerings.
* Assumptions underlying the allowance for inventory obsolescence include
future sales trends and offerings and the expected inventory requirements
and inventory composition necessary to support these future sales
offerings. The estimate of the Company's allowance for inventory
obsolescence could materially change from period to period due to changes
in product offerings and consumer acceptance of those products.
* This accounting estimate is in respect of the Inventory line item on
the Company's Consolidated balance sheet, which comprises approximately
1% of total assets as at December 31, 2006. If the allowance for
inventory obsolescence was inadequate, the Company could experience a
charge to operations expense in the future. Such an inventory
obsolescence charge does not result in a cash outflow.
Capital assets and Goodwill
General
* The accounting estimates for Capital assets and Goodwill represent
approximately 67% and 19%, respectively, of the TELUS' Consolidated
balance sheet, as at December 31, 2006. If TELUS' estimated useful lives
of assets were incorrect, it could experience increased or decreased
charges for amortization of intangible assets or depreciation in the
future. If the future were to adversely differ from management's best
estimate of key economic assumptions and associated cash flows were to
materially decrease, the Company could potentially experience future
material impairment charges in respect of its capital assets, including
intangible assets with indefinite lives and goodwill. If intangible
assets with indefinite lives were determined to have finite lives at some
point in the future, the Company could experience increased charges for
amortization of intangible assets. Such charges do not result in a cash
outflow and of themselves would not affect the Company's immediate
liquidity.
The estimated useful lives of assets; the recoverability of tangible assets
* The estimated useful lives of assets are determined by a continuing
program of asset life studies. The recoverability of tangible assets is
significantly impacted by the estimated useful lives of assets.
* Assumptions underlying the estimated useful lives of assets include
timing of technological obsolescence, competitive pressures and future
infrastructure utilization plans.
The recoverability of intangible assets with indefinite lives; the
recoverability of goodwill
* Consistent with current industry-specific valuation methods, the
Company uses a discounted cash flow model combined with a market-based
approach in determining the fair value of its spectrum licences and
goodwill. See Note 14(c) of the Consolidated financial statements for
further discussion of methodology.
* The most significant assumptions underlying the recoverability of
intangible assets with indefinite lives and goodwill include: future cash
flow and growth projections including economic risk assumptions and
estimates of achieving desired key operating metrics and drivers; future
weighted average cost of capital; and annual earnings multiples.
Significant factors impacting these assumptions include estimates of
future market share, key operating metrics such as churn and ARPU, level
of competition, technological developments, interest rates, market
economic trends, debt levels and the cost of debt. Note 14(c) of the
Consolidated financial statements discusses sensitivity testing.
Investments
The recoverability of long-term investments
* The Company assesses the recoverability of its long-term investments on
a regular, recurring basis. The recoverability of investments is assessed
on a specific identification basis taking into consideration expectations
about future performance of the investments and comparison of historical
results to past expectations.
* The most significant assumptions underlying the recoverability of
long-term investments are the achievement of future cash flow and
operating expectations. The estimate of the Company's recoverability of
long-term investments could change from period to period due to the
recurring nature of the recoverability assessment and due to the nature
of long-term investments (the Company does not control the investees).
* If the allowance for recoverability of long-term investments were
inadequate, the Company could experience an increased charge to Other
expense in the future. Such a provision for recoverability of long-term
investments does not result in a cash outflow.
Future income tax liabilities
The composition of future income tax liabilities
* Future income liabilities are comprised of the tax effect of temporary
differences between the carrying amount and tax basis of assets and
liabilities as well as the tax effect of undeducted tax losses. The
timing of the reversal of the temporary differences is estimated and the
tax rate substantively enacted for the periods of reversal is applied to
the temporary differences. The carrying amounts of assets and liabilities
are based upon the amounts recorded in the financial statements and are
therefore subject to accounting estimates that are inherent in those
balances. The tax basis of assets and liabilities as well as the amount
of undeducted tax losses are based upon the applicable income tax
legislation, regulations and interpretations, all of which in turn are
subject to interpretation. The timing of the reversal of the temporary
differences and the timing of deduction of tax losses are estimated based
upon assumptions of expectations of future results of operations.
* Assumptions underlying the composition of future income tax liabilities
include expectations about future results of operations, the timing of
reversal of deductible temporary differences and taxable temporary
differences, and the timing of deduction of tax losses. These assumptions
also affect classification between income and other taxes receivable or
payable and future income tax liabilities. See Section 10.7 Tax matters.
The composition of future income tax liabilities is reasonably likely to
change from period to period because of changes in the estimation of
these significant uncertainties.
* This accounting estimate is in respect of material asset and liability
line items on the Company's Consolidated balance sheet comprising
approximately 7% of total liabilities and shareholders' equity as at
December 31, 2006. If the future were to adversely differ from
management's best estimate of future results of operations and the timing
of reversal of deductible temporary differences and taxable temporary
differences, the Company could experience material future income tax
adjustments. Such future income tax adjustments could result in
acceleration of cash outflows at an earlier time than might otherwise be
expected.
Advance billings and customer deposits
The accruals for CRTC deferral account liabilities
* The deferral account arose from the CRTC requiring the Company to defer
the income statement recognition of a portion of the monies received in
respect of residential basic services provided to non-high cost serving
areas; such deferral requirement ended on May 31, 2006. The revenue
deferral was based on the rate of inflation, less a productivity offset
of 3.5%, and an "exogenous factor" that was associated with allowed
recoveries in previous price cap regimes that have now expired. The
critical estimate arises from the Company's recognition of the deferred
amounts. The Company may recognize the deferred amounts upon the
undertaking of qualifying actions, such as Service Improvement Programs
in qualifying non-high cost serving areas, rate reductions (including
those already mandated by the CRTC in respect of discounts on Competitor
Digital Network services) and/or rebates to customers. As described in
Note 19(a) of the Consolidated financial statements and Section 10.3
Regulatory - Price cap regulation, amounts in the deferral account are
currently the subject of appeals to the Federal Court of Appeal by
certain consumer groups and Bell Canada.
* Assumptions underlying the accruals for the CRTC deferral account that
were uncertain at the time of making the estimate include what actions
will ultimately qualify for recognition of deferred amounts and over what
period of time qualifying deferred amounts are to be recognized in the
Company's Consolidated income statement. The manner in which deferred
amounts are recognized, and the amounts thereof, are reasonably likely to
change as such recognition is ultimately dependent upon future decisions
made by the CRTC, and resolution of appeals to the courts.
* This accounting estimate is in respect of an item within the advance
billings and customer deposits line item on TELUS' Consolidated balance
sheet and which, itself, comprises approximately 4% of total liabilities
and shareholders' equity. If the Company's estimate of deferred amounts
recognized, and the timing of the recognition thereof, were to differ
materially from what the CRTC ultimately decides is allowable, revenues
could possibly be materially impacted. Such a revenue impact would not be
expected to be accompanied by a corresponding impact in net cash inflows.
Should the consumer groups be successful in their appeal of the use of
deferral account amounts, the Company may be required to remit a one-time
refund to its entire local residential subscriber base. As the deferral
account balance was fully provided for in previous financial statements,
the potential refund will not impact TELUS' subsequent income from
operations. Such a refund would result in a net cash outflow, potentially
offset by reduced capital investment as the Company re-addresses its
intent to extend broadband services to uneconomic remote and rural
communities. In the event that Bell Canada is successful in its appeal,
TELUS may realize additional revenue equal to the amount of the deferral
account that would otherwise have been rebated by the CRTC. Such a
revenue impact would not be expected to be accompanied by a corresponding
impact in net cash inflows.
Employee defined benefit pension plans
Certain actuarial and economic assumptions used in determining defined benefit
pension costs, accrued pension benefit obligations and pension plan assets
* The Company reviews industry practices, trends, economic conditions and
data provided by actuaries when developing assumptions used in the
determination of defined benefit pension costs and accrued pension
benefit obligations. Pension plan assets are generally valued using
market prices, however, some assets are valued using market estimates
when market prices are not readily available. Defined benefit pension
costs are also affected by the quantitative methods used to determine
estimated returns on pension plan assets. Actuarial support is obtained
for interpolations of experience gains and losses that affect the defined
benefit pension costs and accrued benefit obligations. The discount rate,
which is used to determine the accrued benefit obligation, is usually
based upon the yield on long-term, high-quality fixed term investments,
and is set annually. The expected long-term rate of return is based upon
forecasted returns of the major asset categories and weighted by plans'
target asset allocations. Future increases in compensation are based upon
the current benefits policies and economic forecasts.
* Assumptions used in determining defined benefit pension costs, accrued
pension benefit obligations and pension plan assets include: discount
rates, long-term rates of return for plan assets, market estimates and
rates of future compensation increases. Material changes in overall
financial performance and financial statement line items would arise from
reasonably likely changes, because of revised assumptions to reflect
updated historical information and updated economic conditions, in the
material assumptions underlying this estimate. See Note 12(i) of the
Consolidated financial statements for further analysis.
* This accounting estimate is in respect of a component of the largest
operating expense line item on the Company's Consolidated income
statement. If the future were to adversely differ from management's best
estimate of assumptions used in determining defined benefit pension
costs, accrued benefit obligations and pension plan assets, the Company
could experience future increased defined benefit pension expense. The
magnitude of the immediate impact is lessened, as the excess of net
actuarial gains and losses in excess of 10% of the greater of the benefit
obligation and the fair value of the plan assets is amortized over the
average remaining service period of active employees of the plan.
8.2 Accounting policy developments (Note 2 of the Consolidated financial
statements)
Commencing with the Company's 2006 fiscal year, the Company adopted the
amended recommendations of the Canadian Institute of Chartered Accountants
(CICA) for measurement of non-monetary transactions (CICA Handbook Section
3830). The Company's operations were not materially affected by the amended
recommendations.
Convergence with International Reporting Standards
In 2006, Canada's Accounting Standards Board ratified a strategic plan that
will result in Canadian GAAP, as used by public companies, being converged
with International Financial Reporting Standards over a transitional period
currently expected to be about five years. The precise timing of convergence
will depend on an Accounting Standards Board progress review to be undertaken
by early 2008. As this convergence initiative is very much in its infancy as
of the date of these Consolidated financial statements, it would be premature
to currently assess the impact of the initiative, if any, on TELUS.
Comprehensive income
Commencing with the Company's 2007 fiscal year, the new recommendations of the
CICA for accounting for comprehensive income (CICA Handbook Section 1530), for
the recognition and measurement of financial instruments (CICA Handbook
Section 3855) and for hedges (CICA Handbook Section 3865) will apply to the
Company. In the Company's specific instance, the transitional rules for these
sections require prospective implementation at the beginning of a fiscal year
(the exception being in respect of the cumulative foreign currency translation
adjustment, which is retroactively adjusted for at the beginning of the fiscal
year of adoption). Currently, the concept of comprehensive income for purposes
of Canadian GAAP, in the Company's specific instance, will be primarily to
include changes in shareholders' equity arising from unrealized changes in the
fair values of financial instruments.
Comprehensive income as prescribed by U.S. GAAP is largely aligned with
comprehensive income as prescribed by Canadian GAAP, including the impacts of
the new recommendations for the recognition and measurement of financial
instruments and for hedges. In the Company's specific instance, however, there
is currently a difference in other comprehensive income in that U.S. GAAP
includes, in respect of pension and other defined benefit plans, the
difference between the net funded plan status and the net accrued benefit
asset or liability. Canadian GAAP does not include this currently, but an
exposure draft from Canada's Accounting Standards Board is expected in the
first half of 2007 that would eliminate this difference.
The majority of the impact on the Company of adopting the other comprehensive
income and related standards currently arises from the Company's cross
currency interest rate swap agreements, and to a lesser extent, the
cash-settled equity forward agreements that the Company entered into in
respect of share-based compensation.
Accounting changes and Business combinations
Commencing with the Company's 2007 fiscal year, the new recommendations of the
CICA for accounting changes (CICA Handbook Section 1506) will apply to the
Company. Most significantly, the new recommendations stipulate that voluntary
changes in accounting policy are made only if they result in the financial
statements providing reliable and more relevant information and that new
disclosures are required in respect of changes in accounting policies, changes
in accounting estimates and correction of errors. The Company is not currently
materially affected by the new recommendations.
Capital disclosures
Effective December 31, 2006, the Company early adopted the new recommendations
of the CICA for disclosure of the Company's objectives, policies and processes
for managing capital (CICA Handbook Section 1535), as discussed further in
Note 3 of the Consolidated financial statements.
Earnings per share
Amendments were proposed to the recommendations of the CICA for the
calculation and disclosure of earnings per share (CICA Handbook Section 3500)
and would have applied to the Company; such amendments had progressed to the
typescript stage. In July 2006, the typescript with the proposed amendments
was withdrawn and an announcement was made indicating that an International
Financial Reporting Standards-based exposure draft from Canada's Accounting
Standards Board would be issued at a later date, now expected in the first
half of 2007.
Other recently issued accounting standards not yet implemented
Under U.S. GAAP, effective for its 2007 fiscal year, the Company is expected
to be required to comply with accounting for uncertain income tax positions,
as prescribed by Financial Accounting Standards Board Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes. TELUS has assessed the
cumulative impact of adopting this new standard as of January 1, 2007. Based
upon this review, the Company does not expect the adoption of this
Interpretation will have a material impact on its Consolidated financial
statements.
9. Looking forward to 2007
The following discussion is qualified in its entirety by the Forward-looking
statements at the beginning of Management's discussion and analysis, and
Section 10: Risks and risk management.
9.1 General outlook
In 2006, the telecommunications market experienced trends similar to those in
recent years. The wireless sector continued to face competitive pressures,
while generating profitable growth. The wireline sector faced increased
competitive pressures and lower profitability. Canadian telecommunications
operators maintained their focus on core operations and cash flow generation,
and continued to pursue enhanced efficiencies and divestiture of non-core
assets.
The Canadian telecom industry, including wireline and wireless, generated
estimated revenues of approximately $38 billion in 2006, with Bell Canada
and its affiliated telecommunications companies representing about 45% of
the total. As the second largest telecommunications provider in Canada, TELUS
generated almost $8.7 billion of revenue in 2006, or approximately 23% of
the total.
Revenue growth in the Canadian telecom market in 2006 was about 6%, an
improvement on the 3.5 to 4.5% growth experienced over the past few years, and
better than overall GDP growth. Wireless and enhanced data continued to be the
growth engine for the sector with revenues growing approximately 17% over
2005. Offsetting wireless growth was continued general industry weakness in
wireline voice with declining long distance and legacy data revenues, although
this decline was partially offset by growth in enhanced data services. TELUS'
focus on wireless, data and IP resulted in TELUS surpassing the industry
average in 2006 with 6.6% consolidated revenue growth. A similar growth rate
for TELUS is expected in 2007.
The telecom landscape is expected to remain competitive. On the wireline
front, traditional services remain under pressure with industry revenues
declining for the fifth consecutive year. Local and long distance revenues are
expected to continue to be impacted by consumer migration from wireline to
wireless and VoIP services.
With basic cable-TV subscriber additions flat and high-speed Internet
subscriber growth slowing, cable-TV companies have increased certain pricing,
are launching higher-speed Internet services and are rolling out Internet
telephony and digital cable-TV services to fuel growth. By the end of 2006,
Shaw Communications had captured approximately 200,000 residential telephone
subscribers in B.C. and Alberta, and announced plans to roll out their service
throughout both provinces in 2007. Similarly, Rogers Communications and
Videotron have launched Internet telephony service in their service areas in
Central Canada.
The wireless market in Canada is predicted to continue to be competitive and
to generate continued growth as penetration rates (wireless subscribers
divided by population) increase.
Overall, the telecom industry appears to be heading towards a less regulated
environment with several decisions from the federal government and CRTC
removing regulatory constraints. The federal government has stated its intent
to move the telecommunications industry from its current regulated
environment towards a more open environment that is based on a reliance on
market forces to the maximum extent feasible.
In April, the CRTC established a framework for forbearance from the regulation
of local services. Subsequently, the federal government proposed changes to
the regulatory environment that, if implemented, will significantly alter the
terms of the CRTC's local forbearance framework. Similarly, in November, the
federal Minister of Industry overruled the CRTC's previous decision to
regulate telecom VoIP offerings by deregulating access-independent VoIP
providers.
In 2006, companies with greater wireless exposure generally benefited from
higher revenue and cash flow growth, resulting in share price appreciation.
Capital markets and investors continue to look for growth in wireless and data
to generate ongoing operating earnings and cash flow growth, while closely
monitoring how operators protect their legacy revenues and margins. Toward the
end of 2006, both telecom and cable-TV companies announced plans to return
capital to shareholders through share buybacks and increased dividends.
With 44% of consolidated revenue being wireless, as well as exposure to other
growth services such as high-speed Internet, TELUS TV and IP and data services
for enterprise clients, TELUS is well positioned to potentially continue its
strong performance.
Wireless
The wireless industry continues to experience robust growth with
year-over-year industry revenue and EBITDA growth of approximately 16% and
28%, respectively.
The growth opportunity remains given that Canada's penetration rate trails
those of other developed countries due to structural and timing differences.
The penetration rates in many Western European countries passed 100% in 2006,
whereas Asian countries such as Korea are approaching 80% penetration. These
penetration rates are not exactly comparable or achievable in Canada or the
U.S. due to higher quality, lower cost, fixed-rate local service here,
multiple subscriptions being possible on one GSM handset in Europe and
differences in postpaid and prepaid mix. Closer to home, the U.S. wireless
industry is more comparable to Canada, with a penetration rate of approximate
76%, but has benefited from a start two years earlier than Canada. In
contrast, when looking at the major reporting Canadian operators, Canada is
continuing to grow strongly with approximately 1.7 million new subscribers in
2006, or a 4.6 point increase in penetration to more than 56%. A similar rate
of growth in 2007 is generally expected.
Another growth opportunity in the wireless industry is in data services such
as text messaging, mobile computing, gaming, ringtones, music, mobile TV and
PDAs. As adoption and usage rates accelerate, these services are driving
higher data ARPU. To capture this opportunity, Canadian wireless providers are
well advanced in building next generation higher-speed wireless networks. Data
ARPU increases are offsetting the decline in voice revenues caused by price
competition and flat minutes of use.
Data ARPU as a percentage of total ARPU varies throughout the world, with Asia
and Europe at approximately 20% and 15%, respectively. Data in
the U.S. is approximately 15% of total revenue, in Canada is approaching
10%, and is growing strongly in both countries.
Competition within the wireless market is anticipated to remain intense due to
a number of factors. While TELUS, Rogers and Bell account for the majority of
market share, the mobile virtual network operator (MVNO) market is expected to
continue to expand in 2007. Virgin Mobile grew its presence in 2006, and was
joined by Videotron, partnering with Rogers to offer an MVNO wireless phone
service. Retailer brands such as President's Choice and 7-Eleven stores also
launched MVNO offerings. In 2006, TELUS announced the 2007 launch of premium,
differentiated services under the Amp'd Mobile brand. In the price-sensitive
prepaid market, Bell and Rogers are promoting their respective Solo and Fido
discount brand offerings to compete against the MVNOs and TELUS.
As mandated by the CRTC, an industry-wide implementation of a wireless number
portability capability for end users is expected to come into effect in March
2007. The removal of this key switching barrier may increase overall industry
churn rates through the remainder of 2007. (See Section 10.3 Regulatory -
Implementation of wireless number portability.)
There has been some speculation that Industry Canada may encourage additional
competition through a spectrum auction, expected in 2008, by capping the
amount of spectrum any one provider can purchase or setting spectrum aside for
a new entrant. While a new entrant provider would face significant hurdles
such as high penetration rates and large capital commitments for network
investment and start-up costs, the introduction of a new competitor could
likely increase competitive intensity. (See Section 10.1 Competition - Future
availability of wireless spectrum.)
TELUS is well positioned in the Canadian wireless market where it leads the
major industry providers with the lowest churn and highest ARPU. While TELUS
does not have any MVNO relationships or discount brands, its exclusive
relationship with Amp'd Mobile will target young adults and is expected to
bring highly differentiated and premium data-focused entertainment,
information and messaging services to Canadians in the second quarter of 2007.
Wireline
In contrast to wireless, expectations for the mature wireline segment are more
modest. Residential access lines continue to be impacted by migrations to
wireless services, reduction in the number of second lines, and substitution
to VoIP services, particularly those offered by cable-TV providers. The long
distance market is expected to decline further, as VoIP providers continue to
aggressively price and promote voice packages to customers, and customers use
other technologies such as e-mail.
While non-facilities-based VoIP service providers have had modest success with
local telephony, the biggest challenge to incumbent telecom players is coming
from Canadian cable-TV companies that operate their own facilities and
distribution channels. It is estimated that the four cable-TV companies had
more than 1.1 million local cable telephony subscribers in 2006, up almost
800,000 from 2005.
The consumer market is expected to continue to be highly competitive as
advances in technology blur the boundaries between the telecom, video,
broadcast and entertainment distribution sectors. With its Future Friendly
Home strategy, TELUS is positioned to grow wallet share with consumers, while
enhancing retention and loyalty through its multiple service offerings.
Following its launch of TELUS TV in 2005, TELUS has continued to roll out this
service in certain markets in British Columbia and Alberta. Combined with its
wireline local and long distance, wireless, and high-speed Internet services,
TELUS' goal is to use a quadruple play product offering to achieve competitive
differentiation compared to competitors by offering a premium, integrated set
of services that allows customers more freedom, flexibility and choice.
TELUS' ability to compete effectively in wireline is expected to be enhanced
by the changing regulatory environment in Canada. For example, the federal
government recently proposed that regulation of local phone services no longer
be required in markets where consumers have the choice of the ILEC and two
other facilities-based providers (including a competitive wireless provider).
Similarly, forbearance may be applied where businesses have a choice between
the ILEC and one other facilities-based provider. As this would apply to
markets where an ILEC, an independent wireless provider and another
facilities-based provider such as a cable-TV company are present, TELUS would
expect to be in a position to achieve deregulation in most of its incumbent
urban local exchanges in 2007, if the proposal is enacted in early 2007. In
addition, no further price cap regulation is expected in the local consumer
market when the current price cap regime ends in June 2007.
Certain elements of the business market, such as IP and data, continue to show
signs of strength. However, the frontier between telecom and IT remains
competitive, with IT service providers moving down the value chain into the
communications space, and telcos looking to push beyond their traditional
niche. Network equipment manufacturers are also moving up the value chain into
the managed network space.
Legacy voice and data services are expected to continue to decline due to the
accelerated adoption of IP services as a result of businesses and large
enterprises upgrading their legacy networks and equipment. TELUS expects to
have continued success by offering enterprise clients integrated, managed
solutions focused on key verticals such as the energy sector, financial
services, the public sector and the healthcare industry.
In order to grow their businesses, telcos continue to move outside of their
traditional ILEC areas into non-ILEC territories by focusing on managed
solutions and high priority verticals. They are expected to continue
developing single IP-based platforms to provide combined IP voice, data and
video solutions, thereby creating cost efficiencies to, at least in part,
compensate for future margin pressures from the migration from legacy to
IP-based services.
TELUS' strategic focus on delivering national business services in data and
IP, coupled with its exposure to the wireless market, solidly position the
Company to continue its growth in 2007 and beyond.
9.2 Financial and operating targets for 2007
The following discussion is qualified in its entirety by the Forward-looking
statements at the beginning of Management's discussion and analysis, as well
as Section 10: Risks and risk management. TELUS' 2007 targets were originally
announced on December 14, 2006.
The Company has received regulatory approval to amend its share option plans
to provide for cash settlement, and in January 2007, determined that the
feature would be available for substantially all currently vested options and
those vesting in 2007. Cash settlement mitigates dilution from issuing shares
from treasury, and allows cash payments for the difference in value between
the market price and the exercise price of shares to be deductible for tax
purposes when options are exercised, which is expected to result in
significant future tax savings. This change results in an increased non-cash
option expense (an operating expense) for accounting purposes, which is
estimated at $150 to $200 million ($120 to $150 million in wireline and $30 to
$50 million in wireless). The expense is expected to be substantially recorded
in the first quarter of 2007. TELUS' 2007 stated targets for segmented EBITDA,
consolidated EBITDA and EPS exclude the non-cash accounting expense expected
to be recorded in regards to implementing the cash settlement for options.
Wireline revenue is expected to increase 1 to 2% in 2007, driven largely by
data. Wireline EBITDA, prior to the change to 2007 expenses for cash
settlement of options, is expected to be down 1 to 3% due to continued
competitive pressures, initial expenses related to launch of growth-oriented
products and services, and lower profitability margins.
Wireless revenue is expected to increase 12 to 13% in 2007 due to continued
strong growth in wireless subscribers and increased wireless data adoption and
usage. Wireless EBITDA, prior to the change to 2007 expenses for cash
settlement of options, is expected to increase 11 to 14% in the year.
The expected earnings per share in 2007 reflects overall higher operating
profitability, lower financing costs as a consequence of reduced debt levels
and lower interest rates on debt refinancing, and an expected decrease in
total outstanding shares. The 2007 EPS growth is expected to be affected by
increased depreciation expense and $0.30 to $0.40 for an after-tax impact from
the change to cash settlement of options. TELUS' comparative EPS for 2006
included approximately $0.48 of positive impacts from the settlement of tax
matters and changes to tax legislation. Because of these factors, EPS for
2007, excluding the change to cash settlement of options, is expected to be
flat to 6% higher than reported for 2006.
Earnings per share, cash balances, net debt and common equity may be affected
by the potential purchases of up to 24 million TELUS shares over a 12-month
period under the normal course issuer bid that commenced December 20, 2006.
--------------------------------------------------------------------------------------------------------------------------------
Targets for 2007 Results for 2006 Change
--------------------------------------------------------------------------------------------------------------------------------
Consolidated
Revenues $9.175 to $9.275 billion $8.681 billion 6 to 7%
EBITDA (1) excluding charge for cash settlement
feature for vested options in 2007 (2) $3.725 to $3.825 billion $3.590 billion 4 to 7%
Earnings per share (EPS) excluding after-tax
charge for cash settlement of options in 2007 (3) $3.25 to $3.45 $3.27 (1) to 6%
Capital expenditures Approx. $1.75 billion $1.618 billion 8%
---------------------------------------------------------------------------------------------------------------------------------
Wireline segment
Revenue (external) $4.85 to $4.9 billion $4.823 billion 1 to 2%
EBITDA excluding charge for cash settlement
of options in 2007 (2) $1.775 to $1.825 billion $1.839 billion (3) to (1)%
Capital expenditures Approx. $1.2 billion $1.191 billion Unchanged
High-speed Internet net additions More than 135,000 153,700 12)% or better
---------------------------------------------------------------------------------------------------------------------------------
Wireless segment
Revenue (external) $4.325 to $4.375 billion $3.858 billion 12 to 13%
EBITDA excluding charge for cash settlement
of options in 2007 (2) $1.95 to $2.0 billion $1.751 billion 11 to 14%
Capital expenditures Approx. $550 million $427 million 29%
Wireless subscriber net additions More than 550,000 535,200 3% or more
--------------------------------------------------------------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest taxes depreciation and amortization
(EBITDA), alternatively calculated as Operating revenues less Operations expense
less Restructuring and workforce reduction costs.
(2) Excluding an expense of $150 to $200 million in 2007 for a change to add a cash
settlement choice for vested options, of which, $120 to $150 million is in wireline
and $30 to $50 million is in wireless.
(3) Excluding $0.30 to $0.40 for cash settlement of options.
--------------------------------------------------------------------------------------------------------------------------------
Assumptions for 2007 targets include:
* Economic growth consistent with recent provincial and national estimates by
the Conference Board of Canada, including the revised 2007 real GDP growth
of 2.7% in Canada;
* Increased wireline competition in both business and consumer markets,
particularly from cable-TV and VoIP companies;
* Forbearance for local retail wireline services in major urban markets by
the second half of 2007;
* No further price cap mandated consumer price reductions;
* A wireless industry market penetration gain of 4.5 to five percentage
points;
* Approximately $50 million of restructuring and workforce reduction expenses
($67.8 million in 2006);
* A statutory tax rate of approximately 33 to 34%;
* A discount rate of 5.0% and an expected long-term average return of 7.25%
for pension accounting, unchanged from 2006; and
* Average shares outstanding of 330 to 335 million shares for the full year.
As described in Section 5 Consolidated results from operations - Income taxes,
TELUS currently expects minimal cash tax payments in 2007.
TELUS continues to have long-term policy guidelines including Net debt to
EBITDA of 1.5 to 2.0 times, Net debt to total capitalization of 45 to 50% and
a dividend payout ratio guideline of 45 to 55% of sustainable net earnings.
The 2007 targets are in compliance with these policy guidelines.
9.3 Financing plan for 2007
TELUS expects to generate free cash flow in 2007, which would be available to,
among other things, repay debt, repurchase shares and pay dividends to
shareholders. The Company expects to use the proceeds from securitized
receivables and bank facilities, as needed, to supplement its free cash flow
and to meet any other cash requirements.
TELUS also expects to maintain its current position of fully hedging its
foreign exchange exposure for indebtedness and generally expects to maintain a
minimum of $1 billion in unutilized liquidity. At the end of 2006, almost all
of TELUS' total debt was on a fixed-rate basis, and the weighted average term
to maturity was approximately 4.5 years.
In respect of debt maturities, TELUS has U.S. $1,165.5 million of principal
maturing on June 1, 2007. TELUS has taken several steps towards refinancing a
significant amount of these Notes. In May 2006, TELUS successfully issued
$300 million of 5.00% Notes, Series CB, with a seven year maturity. The net
proceeds of the offering were used to pay for the early termination of cross
currency swap agreements related to TELUS' 7.5% U.S. dollar Notes that mature
in June 2007. In addition, the Company has entered into forward starting
interest rate swap agreements that have the effect of fixing the underlying
interest rate on up to $500 million of future debt issuance.
If circumstances warrant, TELUS may consider refinancing all or a portion of
these Notes due June 1, 2007 in advance of the regularly scheduled maturity
date. Potential sources for the refinancing of these Notes may include
retained cash from operations as well as public long-term debt and short-term
debt such as commercial paper. Commercial paper issuance in Canada generally
requires an R-1 (low) rating from Dominion Bond Rating Service and is required
to be supported by committed bank credit facilities. TELUS may increase its
bank credit facilities to support an issuance of commercial paper. TELUS also
has access to a shelf prospectus pursuant to which it can issue a further
$2.7 billion of debt and equity. TELUS believes that its investment grade
credit ratings provide reasonable access to capital markets to facilitate
future debt issuance. For the related risk discussion, see Section 10.6
Financing and debt requirements.
Debt maturities as at December 31, 2006
Long-term debt maturities
---------------------------
($ millions) All except Capital
capital leases leases
--------------------------------------------------------------------------------------------------------------------------------
2007 1,555.0 4.0
2008 122.2 2.6
2009 0.7 0.8
2010 80.0 1.7
2011 2,950.5 0.1
Thereafter 1,049.0 --
---------------------------------------------------------------------------------------------------------------------------------
Total 5,757.4 9.2
--------------------------------------------------------------------------------------------------------------------------------
10. Risks and risk management
[TELUS' risk and control assessment process diagram]
TELUS utilizes a three-level enterprise risk and control assessment process
that solicits and incorporates the expertise and insight of team members from
all areas of the Company.
Level one is the annual risk and control assessment. Key sources of input into
this process include interviews with key senior managers, information and
learnings from TELUS' ongoing strategic planning process and the results of
its annual web-enabled risk and control assessment survey, which is widely
distributed to TELUS' management leadership team (all EVP, VP and Director
level team members and a random sample of management). The survey is based on
the COSO (Committee of Sponsoring Organizations of the Treadway Commission)
enterprise risk management and internal control frameworks.
Additionally, TELUS' assessment process incorporates input from recent
internal and external audits, and commencing in 2006, incorporates input from
management's SOX 404 (Sarbanes Oxley Act of 2002) internal control over
financial reporting compliance activities. Key enterprise business risks are
identified, defined and prioritized, and executive risk owners are engaged and
charged with risk mitigation. Results of the annual risk and control
assessment drive the development of TELUS' internal audit program and are
presented to senior management and the Audit Committee. Risk assessments are
also incorporated back into the Company's strategic planning processes.
In level two, TELUS conducts a quarterly risk assessment review with key
internal stakeholders to capture dynamically changing business risks, monitor
the mitigation of key risks and provide ongoing assurance to the Audit
Committee.
In level three, TELUS conducts granular risk assessments for specific audit
engagements and various risk management initiatives (e.g. environmental
management system, safety audits, business continuity planning, network and IT
vulnerability, and fraud and ethics assessments). The results of the multiple
risk assessments are evaluated, prioritized and updated throughout the year.
TELUS initially implemented its three-level risk and control assessment
process in 2002 and tracks multi-year trends to various key risks and control
environment perceptions across the organization.
TELUS definition of business risk
At TELUS, business risk is defined as the degree of exposure associated with
the achievement of key strategic, financial, organizational and process
objectives in relation to the effectiveness and efficiency of operations, the
reliability of financial reporting, compliance with laws and regulations, and
the safeguarding of assets within an ethical organizational culture.
The following sections summarize the principal risks and uncertainties that
could affect TELUS' future business results going forward, and associated risk
mitigation activities.
10.1 Competition
Aggressive competition may adversely affect market shares, volumes and
pricing in certain TELUS market segments
TELUS' key competitors, having either built or acquired their own network
facilities in Western Canada over the past several years, continue to focus
their efforts on marketing and revenue generation. In the broad business
market, efforts are particularly targeted at the small and medium-sized
business (SMB) market due to its size, its concentrated geographic urban
clustering and generally attractive margins. Competition also remains intense
in the large enterprise market, where traditionally a small number of major
customers can deliver a significant amount of revenue.
Technological advances are blurring the traditional boundaries between
broadcasting, Internet and telecom. With cable-TV companies now offering local
services across most of their regions, competition has also intensified in the
residential local, high-speed Internet access (HSIA) and long distance
markets. As a result, overall industry pricing and customer acquisition
efforts have become competitive across almost all product and service
categories, and customer market segments. Due to industry consolidation in
recent years, TELUS' major competitors have sound financial strength, brand
recognition and, for many, national scope. TELUS' major competitors are
expected to continue to pose a significant challenge to TELUS and there is no
assurance that TELUS' response to the competition will be properly timed or
sufficient to maintain current financial performance.
Risk mitigation: TELUS recently merged its wireline and wireless operations,
giving it the ability to go to market as one national team, under a common
brand, offering a full suite of integrated solutions designed to differentiate
TELUS from its competitors. TELUS also expects to drive continued growth in
non-incumbent markets in Central Canada to offset competitive losses in its
traditional incumbent markets.
Wireline voice and data
The industry transition from legacy voice infrastructure to IP telephony, and
from legacy data platforms to multi-protocol label switching (MPLS) IP
platforms and IP-based service delivery models, continues at a strong pace.
Over the past few years, legacy data services in particular have been subject
to increasing commoditization, aggressive price declines and the impact of
regulatory decisions. Legacy data revenues and margins have declined and are
expected to be only partially offset by increased demand and/or increased
migration of customers to IP-based platforms, which is also subject to intense
pricing pressure and lower margins.
Competition is expected to remain intense, not only from traditional
telephony, data, IP and IT providers, but also from new entrants providing
alternatives to traditional wireline local access and long distance through
the use of voice over Internet protocol (VoIP) telephony. Competitors -
ranging from traditional facilities-based carriers to resellers, IT systems
integrators, long distance dial-around and card providers, and cable-TV
companies - are expected to continue to focus on both the business and
residential markets.
In the business market, various VoIP, customer premises equipment (CPE) and IP
Centrex, data, IP and IT services have been available for several years now
and, in addition to bundling price-discounted local access, wireless and
advanced data and IP services, business market competitors are also bundling
web-based and e-commerce services, and other IT services and support. With
this broader bundling of traditional telecom services with IT services, TELUS
increasingly faces competition from pure Internet and information technology
hardware, software and business process/consulting related companies. In the
coming year, cable-TV companies are also expected to increasingly target the
SMB market with their VoIP services. The result is that traditional and
non-traditional competitors are now focused on providing the full range of
telecommunications services to business markets, particularly in the major
urban areas.
Risk mitigation in the business market: To improve its ability to compete
against this expanded competition, TELUS continues to increase its
capabilities in the overall business market. Through a combination of
acquisitions and partnerships, a focus on priority vertical markets and
continued expansion of strategic solution sets in the enterprise market and a
mass modular approach in the SMB market, TELUS expects to not only counter
competitive inroads, but also to expand its market share nationally.
In the consumer residential market, an increasing number of new VoIP
competitors have emerged over the past few years. The cable-TV companies are
combining residential local VoIP, long distance, HSIA and, in some cases,
wireless services into one bundled or discounted monthly rate, along with
their traditional broadcast services. In addition, non-facilities based
competitors are offering local and long distance VoIP services over the
Internet. This competition, as well as increased technological and wireless
substitution, is expected to continue to contribute to declines in residential
network access lines (NALs). The loss of NALs and attendant revenue declines,
including associated long distance revenues, can be expected to continue as
VoIP providers gain an increasing share of the local access market.
Risk mitigation in the consumer market: TELUS continues to expand its own IP
infrastructure to not only meet the threat of local VoIP services, but also to
expand its ability to enter new markets such as video. TELUS TV is now
available in select areas in Edmonton, Calgary and Vancouver. This helps TELUS
counter the threat from the cable-TV competition in its incumbent markets, and
to regain and grow revenues with a quadruple offering of local and long
distance telephony, HSIA, wireless and IP TV entertainment services, as it
continues to leverage its assets in Internet, wireless and TV to create one of
the best integrated, cross-platform multimedia experiences available in the
market. However, cable competitors including the satellite operations of Shaw
and Bell ExpressVu are expected to compete vigorously to defend market share.
(See Broadcasting below.)
Wireline Internet access
Though the HSIA market is maturing, as just over half of Canadian households
(and more than 60% in Western Canada) and numerous businesses now have HSIA,
growth is still expected while overall pricing is expected to remain
relatively stable. TELUS and its competitors continue to seek differentiation
through a mix of various speed options, value-added features, bundling and,
especially in the business market, managed services solutions. With a more
mature market, net additions for all industry competitors may be reduced, thus
posing a constraint on TELUS' ability to increase its share of total
high-speed Internet subscribers in its territories. Residential dial-up
Internet access lines are declining due in large part to increased HSIA
availability and lower priced high-speed options. There can be no assurance
that the rate of loss of dial-up subscribers or market share retained by TELUS
will be as expected, as TELUS continues to face significant competition from
cable-TV high-speed Internet services in urban areas. However, in rural areas,
TELUS' main competitor to dial-up Internet service is satellite-based
services.
Risk mitigation: Losses of TELUS dial-up Internet subscribers to competitor
high-speed services have been partially mitigated by TELUS' efforts to
transfer these customers to its own high-speed Internet services. TELUS is
increasingly differentiated and able to increase the revenue per household by
the ability to offer a full suite of voice, long distance, wireless and
entertainment services alongside high-speed Internet.
Wireless
Competition in the Canadian wireless market is expected to remain intense in
2007. TELUS is targeting more than 550,000 wireless net subscriber additions
for the year, and there can be no assurance that it will achieve its objective
given the level of competition or the possibility of declining growth rates in
the Canadian wireless industry.
Aggressive advertising and innovative marketing approaches are expected to
remain the norm. TELUS' two national wireless competitors are marketing
discount brands in addition to their traditional brands to attract new
subscribers. These and other competitors continue to offer highly subsidized
handsets, lowered airtime and wireless data prices, and other incentives in
order to attract new customers and obtain enhanced channels of distribution to
market. In addition, the number of wireless brands continues to increase
significantly. Some cable-TV providers have added wireless services through
resale agreements with TELUS' competitors. Virgin Mobile provides wireless
services on a resale basis from Bell Mobility. Competition in the Canadian
wireless market remained intense in 2006, particularly in the prepaid and
youth segments because of these and other resellers. In future, other
competitors, including cable-TV operators or regional telephone companies, may
offer wireless services regionally or nationally on a resale basis, and/or
acquire spectrum and build out their own networks in the event that they
become licensed and obtain spectrum. (See Section 10.3 Regulatory.)
There is risk that increased competition and new brands could increase churn
rates, cause marketing costs of acquisition per subscriber to be higher, and
lower ARPU. In addition, certain carriers launched competitive Push To Talk
(PTT) products in 2005, and other technologies exist that could result in new
PTT services competing more directly with TELUS' Mike and CDMA PTT services.
(See Section 10.2 Technology.)
Bell Mobility entered Western Canada in the fall of 2001, and has its own 1X
network and operational capabilities in urban centres in Alberta and B.C. In
addition, roaming/resale agreements among TELUS, Bell Mobility and affiliates
of Bell were operationalized in mid-2002 and have allowed Bell Mobility to
expand the availability and range of its wireless services to approximately
2.5 million incremental POPs throughout rural Alberta and B.C. This has
allowed Bell Mobility to expand its Western Canadian footprint earlier and
market services more cost-effectively, than if it had to wait to fully build
out its own rural network coverage. The entry of Bell Mobility in these rural
areas increased the effective number of competitors to three (including TELUS)
in these regions. Roaming/resale agreements have also been extended to
higher-speed EVDO services.
Risk mitigation: While TELUS intends to manage these risks by continued focus
on upgrading and enhancing its network, and by continuing to focus on
differentiated value-added services and profitable subscriber growth, there
can be no assurance that these efforts will be successful. Roaming/resale
agreements have similarly allowed TELUS, on a reciprocal basis, to expand its
PCS network coverage and distribution in Central and Atlantic Canada by
approximately 7.5 million people, generally served by two other competitors
previously, bringing TELUS' national digital wireless coverage and addressable
market to 31 million people. TELUS continues to expand its coverage for
higher-speed EVDO services, reaching two-thirds of the Canadian population at
the end of 2006. In addition, in 2007, TELUS intends to launch Amp'd Mobile
powered by TELUS, a premium, differentiated data-focused service, targeting
the young adult market. TELUS' industry-leading churn and ARPU are evidence of
its successful efforts, historically. In 2006, TELUS recorded its highest
annual gross additions and second highest annual net additions in its history.
Wireless Number Portability (WNP)
The introduction of wireless number portability has been mandated for
implementation by March 14, 2007 for all major national competitors. There is
no assurance that TELUS and the other Canadian wireless carriers will be able
to implement WNP. (See Section 10.3 Regulatory.) WNP will remove a barrier to
wireless customers switching from one carrier to another, or from switching
landline phone numbers to wireless or vice versa, and may increase the level
of churn in the market.
Risk mitigation: While TELUS has the smallest installed wireless subscriber
base and lowest churn rate of the major national carriers, which bodes well
for the Company's competitive position, there can be no assurance that TELUS
will be able to achieve the same level of success at maintaining or winning
customers as its competitors.
Future availability of wireless spectrum
Pursuant to the release of the Telecommunications Policy Review Report in
early 2006, and an anticipated spectrum auction policy consultation process,
there has been speculation that the federal government may license a fourth
national carrier either on a preferential basis, or in conjunction with a
removal of foreign ownership restrictions, or by mandating roaming or tower
sharing. This could likely increase competitive intensity. While the current
government has clearly indicated its preference to rely on market forces in
the telecommunications sector, there is no guarantee that it will rely on
market forces to determine the number of competitors or the basis of
competition. (See section 10.3 Regulatory.)
Risk mitigation: New entrant wireless carriers would face significant hurdles
such as large capital commitments for network investment and start-up costs
and increasing penetration rates for Canadians using wireless services. TELUS
intends to be active throughout the expected regulatory consultation process,
underlining the existence of robust competition in the wireless market and
advocating an open auction process that excludes the establishment of
government interventions to subsidize the entry of new carriers.
Fixed wireless
While the technology is generally in an early stage of development, and the
associated economic viability remains unproven, increased competition is
expected from fixed wireless technologies offered by new or existing providers
utilizing licensed and/or unlicensed spectrum to deliver higher-speed data and
Internet services over current and future wireless devices. (See Section 10.2
Technology.) Such availability may lead to increased re-subsidization costs
related to the migration of existing subscribers to advanced feature handsets
based on newer technologies. There can be no assurance that new services
offered by TELUS will be available on time, or that TELUS will be able to
charge incrementally for the services.
Currently spectrum at 2500 MHz has been used for fixed wireless and wireless
broadcast applications. However, 2500 MHz has been given a primary mobile
designation by Industry Canada and is anticipated to become a common global
band for mobile services. In 2006, Industry Canada issued a policy that
provides for a claw back of a portion of the band for auction when mobile
service is implemented in the band, and has announced it intends to auction
unassigned portions of the multipoint distribution service portion of the
band. TELUS expects a 2500 MHz spectrum auction to be announced in 2007 and
scheduled sometime in late 2007 or 2008. Bell and Rogers hold significant
amounts of spectrum at 2500 MHz through their Inukshuk partnership, have
deployed it in major cities including Toronto, Montreal, Calgary, Edmonton and
Vancouver, and are marketing portable DSL service with moderate print and
billboard campaigns. Although TELUS has experienced only limited competition
from this and similar services to date, there can be no assurance that future
marketing of these services will not negatively impact TELUS' wireless or
wireline services.
Industry Canada has issued experimental licences in the 700 MHz range to
various rural operators in the provinces of Alberta and B.C. These operators
are utilizing this spectrum, as well as unlicensed bands, to establish
wireless based point to multipoint networks to market HSIA and VoIP services
to SMB, as well as general consumer users, in rural areas. As TELUS is
generally the only carrier in these areas, there is a risk of market share
loss with the increase in viable alternatives.
In addition, certain non-traditional telecom players, such as municipalities,
may contemplate building fixed wireless ventures in urban and suburban
locations, as has been the case in the U.S. or in Toronto Hydro Telecom's One
Zone service. The build-out and availability of such meshed networks based on
802.11g standards may lead to the reduction of traffic on TELUS' existing
wireless mobile networks and/or increased competition for TELUS' wireline HSIA
service. There can be no assurance that new or existing services offered by
TELUS will be competitive with such fixed wireless services, will be available
on time or that TELUS will be able to charge incrementally for the services.
Risk mitigation: Currently only U.S.-based Sprint-Nextel is looking at mobile
Wi-Max at 2500 MHz, and the development of a vibrant ecosystem appears to be a
number of years out. TELUS intends to monitor developments in this area and
continue to take a proactive approach to product testing and development. It
also intends to lobby Industry Canada to claw back spectrum as soon as
possible and auction it for mobile purposes to ensure Canada is a fast
follower in this band. While there is no guarantee this will occur, the
expected advanced wireless services (AWS) auction also provides an alternative
path to mobile broadband.
Broadcasting
In order to pursue increased revenue opportunities and protect heritage
markets from erosion, TELUS has initiated a targeted neighbourhood commercial
launch of TELUS TV in Edmonton, Calgary and Vancouver area markets. TELUS TV,
a licensed broadcasting distribution undertaking (BDU) service using IP
technology, is still at an early stage in its roll-out, but the Company
expects the service to increase penetration significantly in 2007 and 2008 as
ADSL2+ build-outs are completed, which will expand the addressable market
covered and allow high-definition capability to be integrated into the TELUS
TV offering. While IP TV service will provide opportunities for a quadruple
play offering by TELUS, it is anticipated that cable-TV competitors including
the satellite operations of Shaw and Bell ExpressVu will remain dominant
suppliers in the broadcast distribution market through 2008, and may compete
vigorously to defend market share.
Risk mitigation: IP TV affords TELUS unique competitive advantages relative to
cable-TV such as time shifting programming flexibility, caller ID, text
messaging and an all-digital, near-unlimited selection of channels. In
addition, since only the selected content is sent to the home and with
compression capabilities, less bandwidth is required, resulting in more
capacity for other IP-based services. TELUS continues to pursue a strategy
based on differentiation and value-added service and not on discounted
pricing. This includes a multi-platform content strategy to develop new and
emerging Internet and wireless content opportunities, while it rolls out IP
TV. These platforms are expected to provide advantages relative to traditional
cable offerings, as well as interactivity and customization advantages
relative to satellite.
10.2 Technology
Technology is a key enabler for TELUS and its customers, however, technology
evolution brings risks, uncertainties and opportunities. TELUS is vigorous in
maintaining its short and long-term technology strategy to optimize TELUS'
selection and timely use of technology while minimizing the associated costs,
risks and uncertainties. The following identifies the main technology risks
and uncertainties and how TELUS is proactively addressing them.
Evolving wired broadband access technology standards may outpace
projected access infrastructure investment lifetimes
The technology standards for broadband access over copper loops to customer
premises are rapidly evolving. This evolution is enabling higher broadband
access speeds and is fuelled by user appetite for faster connectivity, the
threat of increasing competitor capabilities and offerings, and the desire of
service providers like TELUS to offer new services that require greater
bandwidth such as TV services. In general, the evolution to higher broadband
access speeds is achieved by deploying fibre further out from the central
office, thus shortening the copper loop portion of the access network, and
using faster modem technologies on the shortened copper loop.
Risk mitigation: In 2005, TELUS began deploying ADSL2+, a next generation of
ADSL technology that enables link rates at up to 24 megabits per second (Mbps)
to the customer premises, compared with up to 8 Mbps for ADSL. ADSL2+
technology is compatible with ADSL and takes advantage of TELUS' investments
in extended reach access (ERA) copper/fibre access infrastructure improvement
programs and in the installed base of ADSL modems. In 2007, TELUS anticipates
it will begin utilizing ADSL2+ bonding and very high bit rate digital
subscriber line (VDSL2) technologies to extend the capabilities of the copper
loops to at least double previous speeds and provide 80 Mbps capabilities.
In 2007, TELUS expects to continue field trials of fibre to the home (FTTH)
technologies utilizing standards-based gigabit passive optical network (GPON)
technology. FTTH is one of several competing proposed FTTx standards (where x
stands for home, curb, pedestal or neighbourhood) in development that TELUS is
actively monitoring. Fibre to the curb (FTTC) with an Ethernet connection to
the premises, which facilitates sustained transfers of up to 100 Mbps and peak
transfers up to one gigabit per second (Gbps), may be a more practical
technology to deploy in new green field neighbourhoods or multiple dwelling
units than the current copper loops. In addition, TELUS is exploring business
models for the economical deployment of fibre-based technologies in areas
currently connected by copper.
These evolving standards, enabled with quality of service (QoS) and network
traffic engineering, all support the TELUS Future Friendly Home strategy to
deliver IP-based Internet, voice and video services over a common broadband
access infrastructure. However, these technologies are evolving faster than
the traditional investment cycle for access infrastructure. The introduction
of these new technologies and the pace of adoption could result in increased
requirements for capital funding not currently planned.
IP-based telephony as a replacement for legacy analog telephony is
evolving and cost savings are uncertain
TELUS continues to monitor the evolution of IP-based telephony technologies
and service offerings and is developing and testing a consumer solution for
IP-based telephony over broadband access in line with the Company's strategic
imperatives and in accordance with TELUS' standards for quality, features and
reliability. This solution could provide additional telephone services over
the same line as legacy analog telephone service or could replace the legacy
analog telephone service. One of the realities of VoIP in the consumer space
is that the actual state of technology developed to inter-work telephony,
video and Internet access on the same broadband infrastructure is in its
infancy and there are risks and uncertainties to be addressed such as ensuring
all services can be delivered simultaneously to the home (and to different
devices within the home) with uncompromised quality. These issues are
exacerbated when the exchange of information is between service providers with
different broadband infrastructures.
A long-term technology strategy is to move all services to IP to simplify the
network, reduce costs and enable advanced future friendly services. Pursuing
this strategy to its full extent would involve transitioning TELUS' standard
telephone service offering to IP-based telephony and phasing out legacy
analog-based telephone service. To this point, TELUS' legacy voice network
infrastructure could be simplified if regular analog telephone lines were
discontinued in favour of digital-only broadband access lines supporting all
services including telephony, Internet and video. This would, for example,
allow inexpensive high-bandwidth conventional Ethernet to be used as the
broadband access technology in the multiple dwelling unit model. However,
digital-only broadband access may not be feasible or economical in many areas
for some time, particularly in rural and remote areas. TELUS needs to support
both legacy and broadband voice systems for some time and, therefore, is
expected to continue to incur costs to maintain both systems. There is a risk
that investments in broadband voice may not be accompanied by decreased costs
of maintaining legacy voice systems. There is also the risk that broadband
access infrastructure and corresponding IP-telephony platforms may not be in
place in time to avoid some re-investment in traditional switching platforms
to support the legacy public switched telephone network access base in certain
areas, resulting in some investment in line adaptation in non-broadband
central offices.
Risk mitigation: TELUS continues to monitor and conduct trials of IP-based
voice technologies to better assess their technical applicability and evolving
cost profiles, as well as to determine the appropriate timing for
implementation by service area in line with TELUS' commitments to the CRTC and
its customers. TELUS is making investments in FTTN technologies and access
technologies that consider the future evolution of IP-based telephony. TELUS
is also working with manufacturers to optimize the operations and cost
structure of analog systems.
The convergence in a common IP-based application environment for telephony,
Internet and video is complex
Traditionally the technology and systems associated with telephony, Internet
and video were different from each other and provided little opportunity for
common platforms for cost savings and little flexibility to integrate media,
services and service development environments. The convergence in a common
IP-based application environment, carried over a common IP-based network,
provides opportunity for cost savings and for the rapid development of more
advanced services that are more flexible and easier to use. Further, the
global standards for drawing together classic wireline and wireless services
into a combined architecture using IP multimedia subsystem are being actively
ratified. However, the transformation from individual traditional silo systems
and architectures to a common environment is very complex.
TELUS has commercially launched one of the world's first IP TV systems, TELUS
TV, utilizing middleware designed specifically for video delivery. The
middleware is designed to allow complex signaling communication between
application software and system hardware in the network, and in the set-top
box in the home. Given that IP TV is in an early stage of development, there
is risk of obsolescence with middleware technology.
Risk mitigation: TELUS is mitigating this risk through modular architectures,
lab investments, partnering with system integrators where appropriate, and
using hardware that is common to most other North American IP TV deployments.
TELUS is ensuring that the IP TV deployment is part of an open framework that
will fit into the overall transformation strategy once standards are ratified
and the actual implementations have stabilized, particularly with the set-top
box.
Support systems will increasingly be critical to operational efficiency
TELUS currently has a very large number of interconnected operational support
systems and business support systems and the complexity is increasing. This is
typical of incumbent telecommunications providers that support a wide variety
of legacy and emerging telephony, mobility, data and video services. The
development and launch of a new service typically requires significant systems
development and integration. The associated developmental and ongoing
operational costs are a significant factor in maintaining competitive position
and profit margins. TELUS is proactive in evolving to next generation support
systems. As next generation services are introduced, they must be designed to
work with both legacy and next generation support systems, which introduces
uncertainty with respect to the costs and effectiveness of the solutions and
the evolution.
Risk mitigation: In line with industry best practice, TELUS' approach is to
separate the business support systems from the operational support systems and
underlying network technology. The aim is to decouple the introduction of new
network technologies from the services sold to customers. This should allow
TELUS to optimize network costs while limiting the impact on customer
services, and to facilitate the introduction of new services by removing,
where possible, any development dependency on the operational support systems.
In addition, TELUS is an active participant in the TeleManagement Forum that
is working to develop standard industry-defined modules in order to reduce the
cost through scale and increase the adoption through scope.
The CDMA and iDEN technologies supporting TELUS' digital cellular/wireless
services may become inferior
The wireless industry continues to expand the deployment of second (2G), third
generation (3G), and what some are calling fourth generation (4G) technologies
to deliver increased data speeds required for many new wireless, IP and data
services. TELUS' evolution to deploying 3G technologies involves technology
paths for both CDMA technology-based services and iDEN technology-based
services.
TELUS continues to support and market CDMA2000 3G wireless services on its
digital CDMA PCS and cellular networks. TELUS began enhancing its wireless
network in 2005 with the next evolution of CDMA 3G technology, namely EVDO (or
1X evolution data optimized) and continued widespread deployment of this
technology in 2006, reaching two-thirds of the Canadian population by the end
of the year. EVDO reliably provides average speeds of 400 to 700 Kbps. In late
2006, TELUS began deploying technology that will enable EVDO revision A (DOrA)
services to be turned up in certain markets in late 2007. DOrA is expected to
allow for a more symmetrical uplink speed to be achieved as well as ultimately
allow QoS services to be enjoyed on the data link.
In late 2006, Rogers launched their UMTS (Universal Mobile Telephone Service)
based HSDPA (High Speed Downlink Packet Access) network in the Golden
Horseshoe area of Ontario with stated plans for national deployment through
2007. UMTS is the evolution of the GSM network toward CDMA-based technologies.
While the underlying technologies of CDMA2000 and UMTS are very similar, they
are implemented in differing standards with no current opportunity for synergy
between the technologies. HSDPA provides downlink speeds similar to EVDO.
Further UMTS standard capabilities have been announced that will continue to
increase downlink speeds as well as introduce improvements to uplink speeds.
As international markets have also begun to deploy UMTS and HSPDA, some
CDMA2000-based international carriers have decided to overlay UMTS-based
networks on their CDMA2000 networks particularly for roaming considerations
or, in some cases, have announced an intention to convert the CDMA2000
subscriber base to UMTS once their networks are completed. Telstra (Australia)
has announced that it intends to migrate all current CDMA2000 subscribers to
UMTS by the end of 2007. Vivo (Brazil) has announced that it intends to
operate both a CDMA2000 and a UMTS service.
While TELUS has enjoyed commercial success with EVDO, and the CDMA2000-based
technologies continue to enjoy scale economies particularly in North America
(vis-a-vis handsets shipped that conform to the CDMA2000 standard versus
UMTS), there can be no assurance that these economies of scale will continue.
Further, there can be no assurance that CDMA2000 path will continue to mature
beyond DOrA into capabilities that will effectively compete with the emerging
UMTS/HSDPA path in terms of speeds and device types. In this regard, TELUS
will be influenced by the technology decisions made by large North American
CDMA carriers as they historically have driven industry-wide economies of
scale that TELUS cannot generate independently. Accordingly, there is risk
that TELUS' future capital expenditures may be higher depending on the
evolution of technology choices made by other large wireless operators,
particularly in North America.
TELUS continues to enjoy commercial success with the Mike service in Canada.
Mike is based on iDEN technology, which is used by 27 million users in a
number of countries around the world, and continues to grow its international
footprint. TELUS' Mike product is differentiated against current CDMA-based
PTT services in Canada in that Mike Direct Connect (iDEN PTT) has superior
call set-up time and inter-call latency. With its Mike service and CDMA based
Instant Talk service, TELUS remains the Canadian leader with the largest
number of subscribers using PTT. Notably, there is currently no GSM-based PTT
service in the Canadian market, but there is risk that one could be introduced
in the future.
Sprint-Nextel, the largest single operator of the iDEN technology, has
publicly committed to improve and market the iDEN network for PTT-centric
customers in the United States to 2012 and beyond. Further, Nextel
International, which markets iDEN-based services in Latin and South America,
has entered into a multi-year commercial agreement with Motorola that ensures
the continued development on subscriber devices up to the end of 2011. TELUS
continues to be active with Motorola and the iDEN community to successfully
commercialize new and evolving subscriber devices.
During 2006, Sprint-Nextel continued to merge its operations as a result of
Sprint's acquisition of Nextel. Sprint-Nextel announced that it will utilize
Q-Chat technology, developed by Qualcomm, to provide future PTT services on
its EVDO revision A (DOrA) CDMA network in addition to its PTT services on the
iDEN network. Q-Chat on CDMA promises potential PTT performance approaching
that of the iDEN technology in terms of call set-up time. It is anticipated
that Sprint-Nextel will commercialize the DOrA-based Q-Chat service in 2008.
It is also expected that Sprint-Nextel will promote interoperability between
its iDEN PTT base and Q-Chat PTT service through a gateway technology once the
Q-Chat service is launched. As TELUS has both iDEN and CDMA-based networks, it
is well positioned to benefit from these technological advancements, however,
there can be no assurance that these technologies will be commercially
successful, or economic for TELUS.
Risk mitigation: As common and continual practice, TELUS optimizes capital
investments to ensure positive payback periods for its investments and strong
flexibility to consider future technology evolutions. Further, a portion of
capital investments (such as towers, leasehold improvements, power systems,
etc.) are technology agnostic. TELUS actively maintains leading performance
indicators for its wireless networks in terms of network performance (such as
dropped and blocked calls) and client management (such as churn indicators).
TELUS maintains a close liaison with its network technology suppliers to
influence and benefit from developments in iDEN and CDMA technology, including
the promotion of convergence of the two technologies in order to maximize
synergies from operating both. In addition, TELUS' roaming/resale agreements
are possible because Bell Mobility and TELUS have similar CDMA technologies.
Emerging wireless technologies represent both an opportunity and a
competitive threat
Wireless technologies and protocols continue to be developed and extended for
a variety of applications and circumstances, such as the Institute of
Electrical and Electronics Engineers (IEEE) 802.xx suite of standards. A
number of wireless technologies are capable of exploiting both licensed and
unlicensed spectrum for both fixed and future mobile applications. While TELUS
constantly reviews and examines such developments, and may from time to time
choose to utilize a number of these technologies, there can be no assurance
that these developments may not adversely impact TELUS in the future. In
particular, the emergence of new Wi-Fi networks, including municipal
deployments, and the development of Wi-Fi-based handsets may have a
significant impact on traditional wireless services, and this may trigger a
movement to VoIP services and promote erosion in ARPU. Further, this may also
trigger an accelerated incremental investment in next generation wireless
infrastructures.
As well, in recent years TELUS and certain of its current and potential
competitors have acquired, through auction, regional radio spectrum licences
in the 3.5GHz and 2.3GHz frequency bands. This spectrum can be used for the
deployment of wireless services utilizing WiMax (802.16) wireless technology.
WiMax is an emerging technology standard that will allow high bandwidth
services to be offered over much wider geographic areas than Wi-Fi. A WiMax
enabled service could attempt to compete against wireline services. At this
time, WiMax does not support mobile services, although a standard (802.16e)
that supports mobile services has recently been ratified by the IEEE. During
2006, Rogers and Bell Canada jointly built a network using pre-WiMax
technology utilizing the Inukshuk 2.5GHz spectrum in numerous major Canadian
cities. There can be no assurance that these emerging wireless technologies
will represent a greater opportunity than threat for TELUS. (See Section 10.1
Competition.) In 2006, Industry Canada issued a policy that provides for a
claw back of a portion of the 2500 MHz band for auction when mobile service is
implemented in the band. (See Section 10.3 Regulatory.)
Risk mitigation: TELUS actively maintains a proactive approach to both the
analysis and testing of emerging and alternative wireless access technologies.
TELUS has categorized what could be considered evolutions of 3G technologies
as well as what could be considered emerging 4G technologies for the purposes
of determining technology maturity, deployment suitability and market
readiness. In parallel, TELUS continues to invest in network upgrades that are
technology agnostic and can be levered across various access technologies.
10.3 Regulatory
Regulatory developments could have an adverse impact on TELUS' operating
procedures, costs and revenues
TELUS' telecommunications and broadcasting services are regulated under
federal legislation by the Canadian Radio-television and Telecommunications
Commission (CRTC), Industry Canada and Canadian Heritage. The CRTC has taken
steps to forbear from regulating prices for services offered in competitive
markets, such as long distance and some data services, and does not regulate
the pricing of wireless services. Local telecommunications services are
regulated by the CRTC using a price cap mechanism. Major areas of regulatory
review currently include the framework for forbearance from the regulation of
residential and business local exchange services, price cap regulation, the
framework for forbearance from the regulation of high-speed intra-exchange
digital services and the utilization of the funds in the incumbent local
exchange carriers' (ILEC) deferral accounts.
In 2005, the federal government undertook a review of Canada's
telecommunications policy and regulatory framework. In March 2006, the review
panel provided its Final Report to the Minister of Industry, recommending an
end to the presumption that telecommunications services must be regulated and
a shift to reliance on market forces. TELUS endorses the recommendations made
by the Telecommunications Policy Review panel in its Final Report and will
continue to advocate implementation of the panel's recommendations in 2007.
The outcome of the regulatory reviews, proceedings and Court or Federal
Cabinet appeals discussed below and other regulatory developments could have a
material impact on TELUS' operating procedures, costs and revenues.
Local forbearance
On April 6, 2006, the CRTC issued Forbearance from the regulation of retail
local exchange services, Decision 2006-15, and established the framework for
forbearance (price deregulation) for local exchange services. This framework
provided guidance on when the ILECs will be eligible for forbearance for their
retail residential and business local exchange services. Wholesale regulation
related to the provision of local exchange service was not within the scope of
this proceeding. An ILEC will be eligible for forbearance from price
regulation of residential or business retail local exchange services in
individual geographic areas known as local forbearance regions (LFRs) when all
of the following five conditions are satisfied: (1) the ILEC's competitors in
the LFR have a combined market share of at least 25%; (2) the ILEC has met the
required standards for each of 14 specified competitor quality of service
(CQoS) indicators for the six-month period preceding the date of the
application; (3) the ILEC makes certain services available to competitors
(i.e., bundled ADSL, Ethernet access and transport services); (4) the ILEC has
implemented competitor access to its operational support systems; and (5) the
ILEC has demonstrated that rivalrous behaviour exists in the relevant market.
The CRTC also shortened the period during which an ILEC is prohibited from
contacting a former residential local exchange customer (regarding any
services), for the purpose of attempting to win the former customer back, from
12 months to 90 days in all LFRs. The existing restrictions on promotions,
bundling, and waiving of service charges would remain in place until
forbearance. The equivalent winback restriction in the business market
remained at 90 days. In addition, an ILEC would be eligible to have the local
winback no-contact rule eliminated entirely in a given LFR when both of the
following two conditions are satisfied: (1) the ILEC's competitors in the LFR
have a combined market share of at least 20%; and (2) the ILEC has met the
required standards for each of 14 specified CQoS indicators for the
three-month period preceding the date of the application.
Since Decision 2006-15 was issued, the CRTC initiated Public Notice 2006-9 to
determine whether mobile wireless services should be considered to be part of
the same relevant market as wireline local exchange services for forbearance
analysis purposes. The CRTC has also initiated Public Notice 2006-12 to
reassess certain aspects of Decision 2006-25 including: (1) whether the market
share forbearance criterion threshold of 25% should be adjusted; and (2)
whether the 20% market share loss threshold related to the local winback rule
remains appropriate.
On October 5, 2006, TELUS applied to the CRTC to review and vary Decision
2006-15 by either removing the requirement for the ILECs to meet competitor
quality of service standards as part of the forbearance criteria, or to limit
the extent to which competitor quality of service standards are included in
the forbearance test. TELUS has no assurance that the CRTC will agree with
TELUS' request to review and vary Decision 2006-15 and modify the forbearance
criteria.
On December 11, 2006, the Minister of Industry proposed significant changes to
the CRTC's framework for forbearance from regulation of residential and
business local exchange services. The proposal would eliminate the current
marketing restrictions on winbacks and most other promotions including the
prohibition on waiving service charges for winback customers. The proposal
would also replace the 25% market share loss test with a simple competitive
presence test that would require the presence of at least three
facilities-based telecommunications service providers (one of which could be
an unaffiliated wireless service provider) for residential local exchange
services, or at least two facilities-based telecommunications service
providers for business local exchange services. As well, the proposal would
reduce the competitor quality of service criteria that must be met as a
pre-condition for forbearance and permit the ex parte filing of tariff
applications for promotions. The proposed forbearance framework is subject to
a public comment period after which the Federal Cabinet can issue an Order in
Council to implement the proposed framework in its present form or revised to
reflect input received during the comment period. There is no guarantee that
this forbearance framework will be issued as proposed.
On December 18, 2006, the Governor in Council issued a direction to the CRTC
to rely on market forces to the maximum extent feasible; to ensure
technological and competitive neutrality and enable competition from new
technologies; to use tariff approval mechanisms that are as minimally
intrusive as possible; to complete a review of the framework for mandated
access to wholesale services; to publish and maintain performance standards
for its various processes; and to continue to explore new ways of streamlining
its processes.
Price cap regulation
Price cap regulation continues to apply to a basket of local services provided
by ILECs. TELUS is subject to price cap regulation as an ILEC in Alberta, B.C.
and Eastern Quebec. On May 30, 2002, the CRTC issued Decision 2002-34 and
established a second four-year price cap period. This four-year price cap
period was extended by one year to May 31, 2007 by the CRTC in Decision
2005-69. The CRTC incorporated a deferral account into the second price cap
period to which an amount equivalent to the cumulative annual productivity
adjustments for residential services in non-high cost serving areas is added.
The productivity adjustments are determined using the gross domestic product
productivity index (GDP-PI) less the productivity offset for the second price
cap period of 3.5%.
The CRTC undertook a thorough review of the current price regulation regime in
2006 for the purpose of establishing the parameters for the next price cap
period. This review was completed in November 2006 and the CRTC is expected to
render its decision in this proceeding by the end of April 2007. There can be
no assurance that the price regulation regime for TELUS beginning in June 2007
will be as or more favourable for TELUS than the current regime.
In February 2006, the CRTC issued Telecom Decision CRTC 2006-9 in which the
CRTC determined that initiatives to expand broadband services to rural and
remote communities and initiatives to improve accessibility to
telecommunications services for individuals with disabilities are an
appropriate use of the funds accumulated in the ILEC deferral accounts. To the
extent that the accumulated deferral account exceeds approved initiatives, the
remaining balance would be distributed in the form of a one-time rebate to
local non-high cost serving area residential customers. Finally, the CRTC
indicated that prospectively no further amounts are to be added to the
deferral account and are to be dealt with via prospective residential local
rate reductions.
In response to Decision 2006-9, TELUS filed its proposal for the use of the
funds accumulated in its deferral account during the second price cap period.
In September, TELUS proposed to expand broadband services to rural and remote
communities and undertake initiatives to improve accessibility to
telecommunications services for individuals with disabilities. On November 30,
2006, the CRTC issued Review of proposals to dispose of the funds accumulated
in the deferral accounts, Telecom Public Notice CRTC 2006-15. This proceeding
will more closely examine the ILECs' proposals for broadband expansion and
allow Internet service providers an opportunity to identify where they are
providing, and intend to provide, high-speed Internet service. TELUS is also
waiting for decisions on two appeals filed with the Federal Court on how the
funds in the ILECs' deferral accounts should be treated. There is no guarantee
that the ILECs will be able to proceed with their proposals for the use of
deferral account funds pending the outcome of the CRTC proceeding initiated by
Public Notice 2006-15 and the appeals to the Federal Court.
Essential services
The CRTC has issued Telecom Public Notice CRTC 2006-14, which will review the
current definition of an essential service and the classifications and pricing
principles for these services and non-essential services made available by the
ILECs to their competitors. This proceeding will include an oral hearing and
is currently scheduled to conclude in January 2008. TELUS has no assurance
that the regulatory regime for the provision of essential and non-essential
services to competitors will not be more onerous than the current regime.
Quality of service rebate program
As part of the current price cap regime, the CRTC established a rate
adjustment plan and associated rate rebates for ILECs that do not meet
approved quality of service standards. TELUS has applied for the impact of
events beyond its control, including TELUS' labour disruption and the flooding
that occurred in Southern Alberta in 2005, to be recognized as adverse events
and for their impact to be removed from TELUS' quality of service results.
Recognition of these adverse events by the CRTC would reduce the quality of
service rate rebates paid by the Company. Nevertheless, TELUS has no assurance
that these penalties will not affect earnings in the future.
TELUS' broadcasting distribution undertakings
The CRTC has approved applications by TELUS to operate terrestrial
broadcasting distribution undertakings to serve various communities in Alberta
and B.C. (August 2003) and Eastern Quebec (July 2005). In September 2003, the
CRTC approved TELUS' application for a video-on-demand undertaking licence
with the same terms and conditions as previously licensed undertakings in
Canada. The licence is national in scope and extends for a seven-year term.
There can be no assurance that implementation costs or projected revenues and
expenses for TELUS' television service will be as planned.
Voice over Internet protocol
In Regulatory framework for voice communication services using Internet
protocol, Decision 2005-28, the CRTC determined that local VoIP services are
functionally equivalent to local exchange service and that the current
regulatory framework governing local competition will apply to local VoIP
service providers. The CRTC also determined that ILECs may only provide VoIP
services in their incumbent territories in accordance with approved tariffs.
In Decision 2006-53, the CRTC reaffirmed Decision 2005-28 and the regulatory
regime established for VoIP services. However, on November 9, 2006, the
Governor in Council issued Order in Council P.C. 2006-1314 and varied
Decisions 2005-28 and 2006-53. As a result, the CRTC will no longer regulate
the provision of access independent VoIP services provided by the ILECs within
their incumbent territories.
Radiocommunication licences regulated by Industry Canada
All wireless communications depend on the use of radio transmissions and,
therefore, require access to radio spectrum. Under the Radiocommunication Act,
Industry Canada regulates, manages and controls the allocation of spectrum in
Canada and licenses frequency bands and/or radio channels within various
frequency bands to service providers and private users. Voice and data
wireless communications via cellular, SMR, ESMR and PCS systems, among others,
require such licences. TELUS' PCS and cellular licences include various terms
and conditions, such as: meeting certain performance levels, meeting Canadian
ownership requirements, obligations regarding coverage and build-out, spending
at least 2% of certain PCS and cellular revenues on research and development,
annual reporting and resale to competitors. While TELUS believes that it is
substantially in compliance with its licence conditions, there can be no
assurance that it will be found to comply with all licence conditions, or if
found not to be compliant that a waiver will be granted, or that the costs to
be incurred to achieve compliance will not be significant. Initial licence
fees and annual renewal fees are payable for licences that have not been
obtained via spectrum auction. There can be no assurance that Industry Canada
will not seek to increase these fees in the future.
A consultation process for the auction of AWS spectrum is expected to be
announced in the first half of 2007, with a subsequent auction expected in
late 2007 or 2008. An AWS auction was recently held in the United States with
existing carriers and U.S. cable-TV companies actively participating. Canadian
cable-TV companies and other entities may be interested in acquiring AWS
spectrum. TELUS supports an open auction for AWS spectrum, without
preferential treatment, but there is no guarantee that government will not
reserve spectrum for new entrants or require incumbents to allow roaming or
tower sharing for new entrants. (See Section 10.1 Competition.)
There is also speculation that Industry Canada may initiate an auction
consultation process for spectrum that has not been assigned in the 2500 and
2600 MHz ranges, particularly in Alberta and Atlantic Canada. While spectrum
in the 2500 and 2600 MHz ranges can be used for both fixed and mobile purposes
(see emerging technologies above), it remains uncertain whether a claw back
for one third of the currently licensed spectrum across Canada, in order to
move to mobile use, will occur prior to the end of licence periods for
Inukshuk and others in 2011. Moreover there is no guarantee that government
will not reserve spectrum for new entrants.
Implementation of wireless number portability (WNP)
In Decision 2005-72, the CRTC directed Bell Mobility, Rogers Wireless Inc. and
the wireless division of TELUS to implement WNP in British Columbia, Alberta,
Ontario and Quebec where local exchange carrier-to-local exchange carrier
(LEC-to-LEC) local number portability is currently in place by March 14, 2007.
In other areas and for other wireless carriers, WNP (where LEC-to-LEC local
number portability is currently in place) for porting-out must be implemented
by March 14, 2007 and for porting-in must be implemented by September 12,
2007. There is no assurance that TELUS and the other Canadian wireless
carriers will be able to implement WNP in the required timeframe and/or
without incurring significant additional costs and/or ongoing administration
costs. Implementation of WNP portability may result in increased migration of
network access lines to wireless services, increased wireless subscriber
monthly churn and/or additional customer retention costs for TELUS.
When implemented in the U.S. in 2003, WNP did not cause a large increase in
churn as initially anticipated. In addition, TELUS believes that WNP may open
up an opportunity to more effectively market into the business/enterprise
market in Central Canada where TELUS has a lower market share than its
wireless competitors and lack of WNP is believed to have decreased its sales
effectiveness. However, there can be no assurance that this will be the case.
Foreign ownership restrictions
TELUS and its subsidiaries are subject to the foreign ownership restrictions
imposed by the Telecommunications Act, the Radiocommunication Act and the
Broadcasting Act. Although TELUS believes that TELUS Corporation and its
subsidiaries are in compliance with the relevant legislation, there can be no
assurance that a future CRTC, Industry Canada or Heritage Canada
determination, or events beyond TELUS' control, will not result in TELUS
ceasing to comply with the relevant legislation. If such a development were to
occur, the ability of TELUS' subsidiaries to operate as Canadian carriers
under the Telecommunications Act or to maintain, renew or secure licences
under the Radiocommunication Act and Broadcasting Act could be jeopardized and
TELUS' business could be materially adversely affected.
While TELUS anticipates the chances of removal of foreign ownership
restrictions under a minority government are low, if foreign ownership
restrictions were reduced or eliminated, the risk of entry of a fourth foreign
owned or financed wireless carrier by way of the anticipated upcoming wireless
spectrum auction would be heightened. (See Section 10.1 Competition.)
Risk mitigation for regulatory matters: TELUS advocates a regulatory
environment that relies, to the greatest extent possible, on market
competition rather than regulatory intervention. TELUS believes this is in the
best interest of customers. TELUS has also supported the relaxation of foreign
ownership restrictions in the past, but believes that any such relaxation must
be on an equal basis for broadcasting and telecommunications companies.
10.4 Human resources
Collective bargaining at TELUS Quebec
Two collective agreements between TELUS Quebec and the Syndicat des agents de
maitrise de TELUS covering professional and supervisory team members in Quebec
expire on March 31, 2007 and are open for renewal negotiations. The larger of
the two covers approximately 511 team members while the other agreement
affects a smaller unit of 20 team members. In any set of labour negotiations,
there can be no assurance that the negotiated compensation expenses or changes
to operating efficiency will be as planned or that reduced productivity and
work disruptions will not occur as a result of or following these
negotiations.
Risk mitigation: A governance model is in place to ensure the financial and
operating impact of any proposed terms of settlement are analyzed and
determined to be aligned with TELUS' strategic direction. As is prudent in any
round of collective bargaining, while negotiations proceed, any potential need
to continue operations in response to work disruptions will be addressed
through contingency planning.
Reliance on key personnel
The success of TELUS is largely dependent on the abilities and experience of
its key employees. Competition for highly skilled and entrepreneurial
management and other key employees is intense in the communications industry.
There can be no assurance that TELUS can retain its current key employees or
attract additional executive officers or key employees as needed. The loss of
certain key employees, or deterioration in employee morale resulting from
organizational changes, unresolved collective agreements or ongoing cost
reductions could have an adverse impact upon TELUS' growth, business and
profitability. The largest external contributor to this risk, namely the
forthcoming retirement of Canada's largest generation, will continue to
increase in magnitude over the next several years.
Risk mitigation: Compensation at TELUS is designed to support its
high-performance culture and is both market-driven and performance-based. This
includes medium and long-term performance incentives including variable
incentive pay based on performance at an individual, business unit and
organizational level; stock options, restricted stock units (RSUs) and the
TELUS Employee Share Purchase Plan; as well as a benefits program, which
allows the tailoring of personal benefits plans to suit individual needs.
Long-term performance incentives for certain key personnel include primarily
three-year vesting periods for options and RSUs. By striving to ensure TELUS'
compensation remains competitive, TELUS is focusing on maintaining the ability
to attract and retain key personnel. Over the past 12 months, TELUS has
further increased focus on talent attraction and retention by leveraging the
merger of the wireless and wireline operations to establish best practices for
recruitment throughout the enterprise; strengthening its focus on enhancing
employee engagement and morale; and launching a strategic retention program
including five-year vesting of certain long-term incentives for highly
regarded senior personnel, diagnosing methods for enhanced retention of all
employees, and implementing targeted retention solutions for employees with
talents that are scarce in the marketplace.
10.5 Process risks
TELUS systems, processes and internal reorganizations could negatively
impact financial results and customer service
TELUS continues to develop a new billing system for the wireline segment,
which includes re-engineering processes for order entry, pre-qualification,
service fulfillment and assurance, customer care, collections/credit, customer
contract and information management. This customer-focused project requires
extensive system development and, in itself, presents implementation risks due
to the complexity of the implementation task and resource constraints, as well
as reliance on newly developed third-party software. TELUS plans to implement
this project in phases beginning with certain consumer accounts in 2007, and
additional phases of conversion are planned over the next few years.
There can be no assurance that this undertaking will not negatively impact
TELUS' customer service levels, competitive position and financial results. As
well, significant time delays in implementing this system could negatively
impact TELUS' competitive ability to quickly and effectively launch new
products and services; achieve and maintain a competitive cost structure; and
deliver better information and analytics to management.
Also, as a result of system changes, staff reduction and training requirements
associated with TELUS' ongoing efficiency improvement efforts, there is
potential for further impact on the operations of TELUS' internal processes
involved with billing that could negatively affect TELUS' earnings.
The ongoing integration of wireless and wireline operations into a single
operating structure incorporates TELUS' customer-facing business units,
technology infrastructure, operations and shared services. There is no
assurance that this integration will provide the benefits and efficiencies
that are expected, or that there will not be significant difficulties in
combining the structures, which could result in a negative impact on operating
and financial results.
Risk mitigation: In July 2006, TELUS implemented a pilot of the new billing
system solution with more than 20,000 consumer accounts to test the entire
solution in a production environment. In addition, project management of this
initiative includes extensive risk, scope and change control, resource, and
quality management. The quality assurance of the solution includes extensive
functional, performance, and revenue assurance testing. TELUS has successfully
implemented several new products and services on its existing billing solution
in advance of implementation. As a result of these factors, the overall risk
for this initiative has declined over the past 12 months and, based on the
current implementation schedule, this risk is expected to be further reduced
over the next 12 months.
With regard to internal reorganizations, TELUS has a dedicated business
transformation group that closely manages these events leveraging expertise,
learnings, and best practices gained from numerous merger and business
integrations as well as efficiency-related reorganizations in recent years.
Cost and availability of services
The availability of various data, video and voice services in competitive
local exchange carrier (CLEC) regions where TELUS' wireline network is only
partly available represents a challenge in terms of delivery deadlines,
quality and cost of services. The lease of facilities from other
telecommunications companies and rebilling for the use of their networks may
prove to be costly and unprofitable.
Risk mitigation: TELUS continues to build its own facilities to reduce
third-party reliance as facilitated by improved economics associated with
winning additional business in the marketplace.
10.6 Financing and debt requirements
TELUS' business plans and growth could be negatively affected if existing
financing is not sufficient to cover funding requirements
Disruptions in the capital markets, increased bank capitalization regulations,
reduced lending to the telecom sector, or a reduced number of active Canadian
chartered banks as a result of reduced activity or consolidation, could reduce
capital available for investment grade corporate credits such as TELUS.
Risk mitigation: TELUS may finance future capital requirements with internally
generated funds as well as, from time to time, borrowings under the unutilized
portion of its bank credit facility or through the issuance of debt or equity
securities.
In May 2005, TELUS entered into $1.6 billion of new bank credit facilities,
which partially mitigates this risk. The new credit facilities consist of an
$800 million (or U.S. dollar equivalent) revolving three-year credit facility
and an $800 million (or U.S. dollar equivalent) five-year revolving credit
facility. TELUS has more than $1.4 billion of available liquidity from
unutilized credit facilities at December 31, 2006.
On July 26, 2002, TELUS Communications Inc. (TCI), a wholly owned subsidiary
of TELUS, entered into an agreement with an arm's-length securitization trust
under which it is able to sell an interest in certain of its trade receivables
up to a maximum of $650 million. As at December 31, 2006, TCI had received
aggregate cash proceeds of $500 million. Under the program, TCI is required to
maintain at least a BBB(low) credit rating by Dominion Bond Rating Service -
currently A(low). In the event this rating is not maintained, the Company may
be required to wind down the program prior to the termination date of the
agreement. Effective November 30, 2006, the termination date was extended by
one year to July 2008.
Ability to finance maturing debt
TELUS has significant debt maturities in 2007 including U.S. $1.17 billion of
TELUS 7.5% Notes maturing in June.
Risk mitigation: TELUS has taken several steps towards refinancing a
significant amount of these Notes. In May 2006, TELUS successfully issued
$300 million of 5.00% Notes, Series CB, with a seven-year maturity. The net
proceeds of the offering were used to pay for the early termination of cross
currency swap agreements related to TELUS' 7.5% U.S. dollar Notes that mature
in June 2007. In addition, the Company has entered into forward starting
interest rate swap agreements that have the effect of fixing the underlying
interest rate on up to $500 million of future debt issuance. TELUS also has
access to a shelf prospectus pursuant to which it can issue a further
$2.7 billion of debt and equity. TELUS believes that its investment grade
credit ratings provide reasonable access to capital markets to facilitate
future debt issuance.
A reduction in TELUS credit ratings could impact TELUS' cost of capital
and access to capital
A reduction in TELUS credit ratings could impact TELUS' cost of and access to
capital. There can be no assurance that TELUS can maintain or improve current
credit ratings.
Risk mitigation: TELUS seeks to achieve, over time, debt credit ratings in the
range of BBB+ to A-, or equivalent. Three of the four credit rating agencies
that rate TELUS now have ratings that are in line with this target and the
fourth currently has TELUS under review for possible upgrade. TELUS has
financial policies in place that were established to help maintain or improve
existing credit ratings. Financial policies include long-term targets for the
net debt to EBITDA ratio of 1.5 to 2.0 times (1.7 times as at December 31,
2006) and the net debt to total capitalization ratio of approximately 45 to
50% (47.5% as at December 31, 2006).
Lower than expected free cash flow could constrain ability to invest in
operations or make purchases under NCIBs
TELUS expects to generate free cash flow in 2007, which would be available to,
among other things, repurchase shares and pay dividends to shareholders. While
anticipated cash flow is expected to be more than sufficient to meet current
requirements and remain in compliance with TELUS' financial policies, these
intentions could constrain TELUS' ability to invest in its operations for
future growth or to complete share repurchases. TELUS has set its financial
policies with the expectation that payment of material cash income taxes will
commence in 2008 and be substantial in 2009, as noted in Section 10.7 Tax
matters. Payment of cash income taxes in the future will reduce the after-tax
cash flow otherwise available to return capital to shareholders. If actual
results are different from TELUS' expectations, there can be no assurance that
TELUS will not need to change its financing plans, including its intention to
repurchase a significant amount of shares, or pay dividends according to the
target payout guideline.
Risk mitigation: In recent years, TELUS had sufficient cash flow to repurchase
shares under NCIBs. The Company announced a new NCIB, effective from December
20, 2006 to December 19, 2007, to repurchase a maximum of 24 million TELUS
shares. Under NCIB programs in place from December 2004 to December 2006, the
Company has repurchased 39.4 million shares for a total of $1.77 billion. As
the Company begins paying cash income taxes after 2007, it may choose to not
renew or to reduce the size of NCIBs, as warranted.
Quarterly, the TELUS Board reviews the dividend based on a number of factors
including a target dividend payout ratio guideline of 45 to 55% of sustainable
net earnings. This review prompted a 36.4% increase in the quarterly dividend
payout rate from 27.5 cents to 37.5 cents effective with the dividend paid on
January 1, 2007. At the January 1, 2007 level of dividend and shares
outstanding, this would total approximately $507 million in dividends in 2007.
10.7 Tax matters
Income tax amounts, including tax expense, may be materially different
than expected
The operations of TELUS are complex and related tax interpretations,
regulations and legislation pertaining to TELUS' activities are subject to
continual change. The Company has significant amounts of income taxes
receivable and payable, as well as future income tax liabilities. These
amounts are based on estimates by TELUS management and potential changes to
them. The timing of realizing such amounts can materially affect the
determination of net income or cash flows in future periods. As noted in
Section 5: Results of operations - Income taxes, TELUS currently expects cash
income taxes to be minimal in 2007, increasing in 2008, and substantial in
2009. In addition, the expected blended statutory income tax rate is expected
to be 33 to 34% in 2007. There can be no assurance that these expectations
will not change as a result of changes in interpretations, regulations and
legislation.
The timing concerning the monetization or realization of future income tax
accounts is uncertain, as it is dependent on future earnings of TELUS and
other events. The amounts of future income tax liabilities are also uncertain,
as the amounts are based upon substantively enacted future income tax rates in
effect at the time, which can be changed by governments. The amount of future
income tax liabilities is also based upon the Company's anticipated mix of
revenues among the jurisdictions in which it operates, which is also subject
to change.
The review activities of the Canada Revenue Agency and other jurisdictions'
tax authorities affect the ultimate determination of the actual amounts of
income taxes receivable, income taxes payable, future income tax assets and
future income tax liabilities. Therefore, there can be no assurance that
income taxes will be payable as anticipated and/or the amount and timing of
receipt or use of the tax-related assets will be as currently expected.
In 2006, the Company continued to further expand its activities into the
United States and other foreign jurisdictions. In the U.S., federal, state and
local jurisdictions have created varying regimes for income, revenue, sales
and use and property taxes. In addition to such regimes being complex, the
sheer number and variation of such regimes in the U.S. jurisdictions in which
the Company has entered into transactions are causes for additional financial
risk to the Company.
Each foreign jurisdiction in which the Company has entered into transactions
has its own taxation peculiarities in addition to the language and currency
complexities such jurisdictions impose. Accordingly, TELUS' foreign expansions
during 2006 have added to the exposure to tax risk the Company faces.
Risk mitigation: The Company maintains an internal Taxation function comprised
of professionals who are trained and educated in taxation administration and
who maintain an up-to-date knowledge base of new developments in the
underlying law, its interpretations and jurisprudence. This function is also
responsible for the specialized accounting required for income taxes and
accordingly this group is charged with maintaining state-of-the-art knowledge
of tax accounting developments and the implementation of such relevant
measures as are required from time to time.
The transactions of the Company are under continuous review by the Company's
Taxation department whereby transactions of an unusual or non-recurring
nature, in particular, are assessed from multiple risk-based perspectives.
Tax-related transaction risks are regularly communicated to and reassessed by
external tax counsel as a check to initial exposure assessment. As a matter of
regular practice, large transactions are reviewed by external counsel and
other third-party advisors may also be engaged to express their view as to the
potential for tax eligibility.
The Company has engaged external counsel and advisors as appropriate to
provide advice and to comply with tax laws in the jurisdictions in which it
has operations of any significance. The advice and returns provided by such
advisors and counsel are reviewed for reasonableness by the TELUS internal
Taxation function.
10.8 Health, safety and environment
Team member health, wellness and safety
Lost work time, resulting from the illness or injury of a TELUS team member,
can negatively impact organizational productivity and employee benefit
healthcare costs.
Risk mitigation: To minimize absence in the workplace, TELUS supports a
holistic and proactive approach to team member health by providing
comprehensive wellness, disability, ergonomic and employee assistance
programs. TELUS has long-standing programs to provide training and orientation
to team members, and contractors and suppliers who access TELUS facilities, in
regards to TELUS' safe work practices and expectations. However, there can be
no assurance that these practices will be effectively followed in all
situations.
Radio frequency emission concerns
Some studies have asserted that radio frequency emissions from wireless
handsets may be linked to certain adverse health effects.
Risk mitigation: The overwhelming evidence in the scientific community, as
determined and published in numerous studies worldwide, supports the
conclusion that there is no demonstrated public health risk associated with
the use of wireless phones. These include a study published in the Journal of
the National Cancer Institute in 2006, involving 420,000 cell phone users in
Denmark, which found that cell phone users are no more likely than anyone else
to suffer a range of cancer types. Government agencies in Canada responsible
for establishing safe limits for signal levels of radio devices also support
the conclusion that wireless telephones are not a health risk. TELUS believes
that the handsets sold by TELUS comply with all applicable Canadian and U.S.
government safety standards.
There can be no assurance that future health studies, government regulations
or public concerns about the health effects of radio frequency emissions would
not have an adverse effect on the business and prospects for TELUS. For
example, public concerns could reduce customer growth and usage or increase
costs as a result of modifying handsets, incremental legal requirements and
product liability lawsuits. TELUS continues to monitor developments in this
area.
Responsible driving
Some studies, including reports released by the Insurance Corporation of B.C.
and the University of Montreal, have shown an increase in distraction levels
for drivers using wireless phones while driving.
Risk mitigation: In July 2004, New Jersey and Washington, D.C. followed a
precedent set by New York in 2001 by enacting bans on handheld wireless phone
use by drivers. Newfoundland & Labrador is currently the only Canadian
province to ban drivers' use of handheld wireless phones, however, as with
similar bans on handheld phone use while driving, the province allows the use
of hands-free wireless kits.
TELUS promotes responsible driving and recommends that driving safely should
be every wireless customer's first responsibility. TELUS believes that current
laws adequately address the matter, and laws that are specific to mobile
phones are unnecessary and counterproductive.
There can be no assurance that additional laws against using wireless phones
while driving will not be passed and that, if passed, such laws will not have
a negative effect on subscriber growth rates, usage levels or wireless
revenues.
Concerns about environmental issues, particularly related to contaminated
property and the associated risk to human health or wildlife
To conduct business operations, TELUS owns or leases a large number of
properties. The presence of fuel systems for back-up power generation enables
the provision of reliable service, but also poses the most significant
environmental risk to the Company. Spills or releases of fuel from these
systems have occurred at times in the past, with maximum cost incurred at any
site of approximately $1 million. Hazardous chemicals are commonly used at
many sites and within the telecommunications industry in general. As well,
certain hazardous materials are found only at some locations. Based on the
volume and the nature of some of the specific chemicals handled, there is a
risk to the Company and its directors and officers posed by the liability from
potential spills and releases of hazardous chemicals into the environment. A
significant portion of this risk is associated with the clean-up of sites
contaminated by historic TELUS practices or by previous owners. There has been
little change to TELUS' environmental risks over the past 12 months. Although
TELUS takes proactive measures to identify and mitigate environmental
exposures and employs an environmental management system, there can be no
assurance that specific environmental incidents will not impact TELUS
operations in the future.
Risk mitigation: TELUS' environmental risks are considered immaterial to
TELUS' financial results, however, poorly executed environmental performance
or risk mitigation could have negative legal, brand or community relations
impacts. The risk posed by fuel systems is being addressed through a program
to install containment and monitoring equipment at sites with systems of
qualifying size. Further detailed assessment of environmental risks can be
found in the TELUS corporate social responsibility report on the Company's
website.
10.9 Litigation and legal matters
Investigations, claims and lawsuits
Given the size of TELUS, investigations, claims and lawsuits seeking damages
and other relief are regularly threatened or pending against the Company and
its subsidiaries. TELUS cannot predict with any certainty the outcome of such
investigations, claims and lawsuits and as such, there can be no assurance
that results will not be negatively impacted.
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan
Two statements of claim were filed in the Alberta Court of Queen's Bench on
December 31, 2001, and January 2, 2002, respectively, by plaintiffs alleging
to be either members or business agents of the Telecommunications Workers
Union (TWU). In one action, the three plaintiffs alleged to be suing on behalf
of all current or future beneficiaries of the TELUS Corporation Pension Plan
and in the other action, the two plaintiffs alleged to be suing on behalf of
all current or future beneficiaries of the TELUS Edmonton Pension Plan. The
statement of claim in the TELUS Corporation Pension Plan related action named
the Company, certain of its affiliates and certain present and former trustees
of the TELUS Corporation Pension Plan as defendants, and claims damages in the
sum of $445 million. The statement of claim in the TELUS Edmonton Pension Plan
related action named the Company, certain of its affiliates and certain
individuals who are alleged to be trustees of the TELUS Edmonton Pension Plan
and claims damages in the sum of $15.5 million. On February 19, 2002, the
Company filed statements of defence to both actions and also filed notices of
motion for certain relief, including an order striking out the actions as
representative or class actions. On May 17, 2002, the statements of claim were
amended by the plaintiffs and include allegations, inter alia, that benefits
provided under the TELUS Corporation Pension Plan and the TELUS Edmonton
Pension Plan are less advantageous than the benefits provided under the
respective former pension plans, contrary to applicable legislation, that
insufficient contributions were made to the plans and contribution holidays
were taken and that the defendants wrongfully used the diverted funds, and
that administration fees and expenses were improperly deducted. The Company
filed statements of defence to the amended statements of claim on June 3,
2002. The Company believes that it has good defences to the actions.
Should the ultimate resolution of these lawsuits differ from management's
assessment and assumptions, a material adjustment to the Company's financial
position and the results of its operations could result.
Risk mitigation: As a term of the settlement reached between TELUS
Communications Inc. and the TWU that resulted in a collective agreement
effective November 20, 2005, the TWU has agreed to not provide any direct or
indirect financial or other assistance to the plaintiffs in these actions, and
to communicate to the plaintiffs the TWU's desire and recommendation that
these proceedings be dismissed or discontinued. However, the Company has been
advised by the TWU that the plaintiffs have not agreed to dismiss or
discontinue these actions, and the Company has not been informed of any change
in this regard.
Ontario Court of Appeal ruling in 2005
In June 2005, the Ontario Court of Appeal unanimously overturned a 2003 trial
court decision and ruled that when TCI's predecessor BC TEL redeemed its $125
million Series AL Bonds in December 1997, it was in breach of a covenant
contained in the deed of trust and mortgage under which the Bonds were issued.
The Ontario Court of Appeal returned the case to the trial courts to determine
damages, and the Supreme Court of Canada denied leave to appeal by the Company
in January 2006. The Ontario Court of Appeal further ruled in November 2006
that this lawsuit should be treated as a representative action by all
bondholders and not just the named plaintiffs. The magnitude of amounts
ultimately paid will depend in part on the method of calculating damages and
who are entitled to damages, which remain to be litigated. Should the assessed
damages be significantly different than management's expectations, a material
adjustment could be recorded in the Company's Consolidated statements of
income.
Risk mitigation: The Company believes that it has conservatively accrued for
damages. This ruling relates to a matter prior to the 1999 merger of BC
TELECOM and TELUS Corporation (Alberta), and does not impact TELUS' current
debt instruments.
Bill 198
On December 31, 2005, provisions announced by the Government of Ontario came
into force, creating liability for misrepresentations by public companies in
written disclosure and oral statements. These amendments also created
liability for fraud and market manipulation. Since then, other provinces have
adopted or are expected to adopt similar legislation.
These amendments create a right of action for damages against TELUS, its
directors and certain of its officers in the event that TELUS or a person with
actual, implied or apparent authority to act or speak on behalf of TELUS
releases a document or makes a public oral statement that contains a
misrepresentation or TELUS fails to make timely disclosure of a material
change.
This legislation permits action to be taken by any person or company that
acquires or disposes of TELUS securities in the secondary market during the
period of time that the misrepresentation remains uncorrected in the public
or, in the case of an omission, until such time as the material change has
been disclosed. It is not necessary for the person or company to establish
that they relied on the misrepresentation in making the acquisition or
disposition.
Risk mitigation: In 2005, TELUS conducted a review of its disclosure practices
and procedures and the extent to which they are documented. As part of that
review, TELUS consulted external advisors. This review indicated that TELUS
has well-documented and fulsome processes in place, including a corporate
disclosure policy (publicly available on telus.com/corporate governance) that
restricts spokespersons to specifically designated senior management, provides
a protocol for dealing with analysts and oral presentations, and has a
disclosure committee to review and determine disclosure of material facts and
information, as well as the communication approach to issues. TELUS
re-evaluated its disclosure practices and procedures in 2006, and believes
that they continue to be appropriate and prudent and that its risk exposure is
reasonable and has not changed significantly over the past 12 months. However,
there can be no assurance that TELUS' processes will be followed by all team
members at all times.
Legal and regulatory compliance
TELUS relies on its employees, officers, Board of Directors, key suppliers and
partners to demonstrate reasonable legal and ethical standards. Situations
might occur where individuals do not adhere to TELUS policies, or where
personal information of a TELUS customer or employee is inadvertently
collected, used or disclosed in a manner that is not fully compliant with
legislation, thereby exposing TELUS to the possibility of damages, sanctions
and fines, or negatively affecting financial or operating results.
In 2006, the Company continued to expand its activities into the United States
and other foreign jurisdictions. Its subsidiaries that operate in foreign
jurisdictions are required to comply with local laws and regulations, which
may differ substantially from Canadian laws and add to the legal exposure the
Company faces.
Risk mitigation: Although management cannot predict outcomes with certainty,
management believes it has reasonable policies, processes and awareness in
place for proper compliance and that these programs are having a positive
effect on reducing risks. Since 2002, TELUS has instituted for its employees,
officers and directors an ethics policy and in 2003, established a toll-free
EthicsLine for anonymous reporting by anyone who has issues or complaints.
Since 2003, TELUS has a designated compliance officer whose role is to work
across the enterprise to ensure that the business has the appropriate controls
and measurements in place to facilitate legal and regulatory compliance,
including compliance under privacy legislation. The compliance officer reports
jointly to the Audit Committee and the Executive Vice-President of Corporate
Affairs. This dual reporting status provides a direct line-of-sight reporting
to the Audit Committee to address identified risks. In addition, external
legal advisors qualified in the relevant foreign jurisdictions are engaged by
TELUS' subsidiaries to provide legal advice as appropriate.
10.10 Manmade and natural threats
Concerns about natural disasters and intentional threats to TELUS'
infrastructure and operations
Recognizing that TELUS, as a communications company, is a key provider of
critical infrastructure to Canada, there exists ongoing exposure to natural
disasters and intentional threats to TELUS' network, IT, physical assets and
team members.
Risk mitigation: TELUS has an extensive business continuity program (BCP) with
resources dedicated to design, maintain and execute business
continuity/disaster recovery plans. The mandate of TELUS' business continuity
office is to develop and maintain a common business continuity program
(policies, processes and metrics) across the organization based on best
practices. This critical program enables TELUS' continued ability to serve
customers, protect corporate assets, and strive to ensure employee protection
and safety.
During 2006, TELUS made progress in regards to a number of multi-year business
continuity readiness initiatives including: updating the health epidemic plan,
improving building structures to mitigate seismic risks, and implementing
web-enabled BCP software to support customized BCP site plan development for
all TELUS locations. In addition, contingency planning was renewed for
outstanding labour negotiations.
Although TELUS has robust and ongoing business continuity planning processes,
there can be no assurance that specific events will not impact TELUS
operations and results.
Security - Electronic attack
Electronic attacks are the intentional acts of individuals or organized groups
to gain unauthorized access to TELUS information or to prevent legitimate
users from gaining access. These acts employ a number of methods ranging from
social engineering - non-technical types of intrusion that rely heavily on
human interaction and tricking people into breaking normal security procedures
- to the use of sophisticated malicious software.
Risk mitigation: TELUS, using a layered security approach, has implemented a
number of proactive, reactive and containment processes and systems to
safeguard its IT infrastructure, information repositories and information
distribution. Information security policies and procedures are in place
governing the duties of those responsible for information confidentiality and
integrity. Intrusion detection systems, access controls and incident response
procedures are in place to provide continuous monitoring of TELUS IT
infrastructure. Although TELUS has robust and ongoing IT and network security
planning processes, there can be no assurance that specific events will not
impact TELUS operations and results.
TELUS faces potential exposure and risk when sharing information with external
business partners and these business partner systems are compromised. TELUS
reviews this risk when entering into new agreements.
Security - Vandalism and theft
TELUS has a number of publicly situated physical assets, including public
payphones, copper cable, network and telephone switch centres, that could be
subjected to vandalism and/or theft.
Risk mitigation: Using factors such as the importance of the asset, the
exposure risks and the potential costs incurred should the asset be damaged or
stolen, TELUS has implemented an array of physical and electronic barriers,
and controls and monitoring systems to protect its assets.
As an additional level of risk management, TELUS has a corporate security
group that continually investigates and evaluates the risks and, in
co-operation with law enforcement and other external agencies, adjusts its
protection to meet changing risks. Although TELUS has thorough physical asset
security planning processes, there can be no assurance that specific events
will not impact TELUS operations and results.
Climate change impacts
TELUS recognizes that the impacts of climate change, including severe weather
events, may bring additional exposure to TELUS infrastructure and operations.
In 2006, specific attention was directed to climate change within the TELUS
business continuity planning framework, including issues such as rising sea
levels, altered patterns of agriculture, potential for increased incidence of
extreme weather events (including flash flooding and high winds), drier
conditions resulting in more wildfires, and the expansion of the range of
tropical diseases, as well as pandemics. Each of these threats has the
potential to affect TELUS operations, from physical damage to scarcity of
resources, thus resulting in impacts on customer service and provision of
emergency services.
Risk mitigation: TELUS has a number of business continuity and network
operations plans and practices in place to address a spectrum of scenarios
linked to climate change impacts. These include but are not limited to the use
of flood tube technology to protect building and network assets from flooding,
the development of equipment relocation plans, and the designed redundancy and
diversity of the Company's networks.
Although TELUS has practices and planning processes in place, there can be no
assurance that specific events will not impact TELUS operations and financial
results.
10.11 Economic growth and fluctuations
Canadian real GDP growth for 2006 was recently estimated by the Bank of Canada
at 2.8%. This estimated growth reflects weaker net Canadian exports and the
weaker near-term outlook for the U.S. economy. The U.S. economy has recently
been constrained by the significant slowdown that is occurring in the U.S.
housing sector and the slowing demand for automobiles. Accordingly, the Bank
of Canada views the U.S. slowdown as a cyclical correction leading to a
temporary slowing of economic growth and not a contraction. The Canadian
consumer price index (CPI) inflation has been volatile due to developments in
the energy markets and effects of the one percentage point reduction in the
federal goods and services tax. However, there are indications of increased
price pressure spilling over into other prices as Canadian core inflation
increased from near 1% to 2% by mid-2006. This was an indication that the
Canadian economy had been operating at just above its productive capacity. The
principal risk to Canadian economic growth is a more pronounced U.S. economic
slowdown and/or a significant decline in global demand for commodities. This
would have a significant negative impact on the demand for Canadian produced
goods and services.
Growth in B.C. and Alberta (estimated 2006 GDP growth rates of 3.6% and 6.6%,
respectively) was higher than the national average, leading to strong housing
growth, and increased business activity in TELUS' incumbent territory. Growth
rates are expected to be moderate in 2007, but remain stronger in the West
than in Central Canada. As noted in Forward-looking statements, TELUS'
assumption for economic growth in Canada is approximately 2.7% in 2007,
consistent with recent estimates from the Conference Board of Canada. There
can be no assurance that Canadian economic growth will attain this level.
Significant economic downturns or recessions may adversely impact TELUS
In the event of an uncertain economy or an economic downturn, residential and
business telecommunications customers may delay new service purchases, reduce
volumes of use, discontinue use of services, or seek lower-priced
alternatives. Significant economic downturns or recessions could adversely
impact TELUS' profitability, free cash flow and bad debt expense, and
potentially require the Company to record impairments to the carrying value of
its assets including, but not limited to, its intangible assets with
indefinite lives (spectrum licences) and its goodwill. Impairments to the
carrying value of assets would result in a charge to earnings and a reduction
in shareholders' equity, but would not affect cash flow.
Risk mitigation: The Company cannot completely mitigate economic risks.
However, by expanding nationally since 2000, TELUS has gained exposure to the
more diversified manufacturing economies in Ontario and Quebec, and has become
somewhat less exposed to regional weakness. TELUS is currently benefiting from
growth in the cyclical resource economies in B.C. and Alberta. Conversely,
reduced growth in Ontario and Quebec has likely contributed to more moderate
growth in TELUS' non-incumbent wireline operations.
Pension funding
Economic fluctuations could also adversely impact the funding and expense
associated with the defined benefit pension plans that TELUS sponsors. There
can be no assurance that TELUS pension expense and funding of its defined
benefit pension plans will not increase in the future and thereby negatively
impact earnings and/or cash flow. Defined benefit funding risks may occur if
total pension liabilities exceed the total value of the respective trust
funds. Unfunded differences may arise from lower than expected investment
returns, reductions in the discount rate used to value pension liabilities,
and actuarial loss experiences.
Risk mitigation: TELUS seeks to mitigate this risk through the implementation
of policies and procedures designed to control investment risk and ongoing
monitoring of its funding position. In 2006, TELUS made cash contributions of
$172 million to its pension plans (including $123 million to its defined
benefit plans) and slightly reduced levels are expected in 2007. While TELUS
cannot apply the surplus in one defined benefit pension plan to a deficit in
another plan, at December 31, 2006, TELUS' defined benefit pension plans in
aggregate were in a surplus position by $263.6 million, as plan assets
exceeded accrued benefit obligations.
11. Reconciliation of non-GAAP measures and definition of key operating
indicators
11.1 Earnings before interest, taxes, depreciation and amortization (EBITDA)
TELUS has issued guidance on and reports EBITDA because it is a key measure
used by management to evaluate performance of business units, segments and the
Company. EBITDA is also utilized in measuring compliance with debt covenants -
see Section 11.4 EBITDA excluding restructuring and workforce reduction costs.
EBITDA is a measure commonly reported and widely used by investors as an
indicator of a company's operating performance and ability to incur and
service debt, and as a valuation metric. The Company believes EBITDA assists
investors in comparing a company's performance on a consistent basis without
regard to depreciation and amortization, which are non-cash in nature and can
vary significantly depending upon accounting methods or non-operating factors
such as historical cost.
EBITDA is not a calculation based on Canadian or U.S. GAAP and should not be
considered an alternative to Operating income or Net income in measuring the
Company's performance, nor should it be used as an exclusive measure of cash
flow, because it does not consider the impact of working capital growth,
capital expenditures, debt principal reductions and other sources and uses of
cash, which are disclosed in the Consolidated statements of cash flows.
Investors should carefully consider the specific items included in TELUS'
computation of EBITDA. While EBITDA has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance and debt
servicing ability relative to other companies, investors should be cautioned
that EBITDA as reported by TELUS may not be comparable in all instances to
EBITDA as reported by other companies.
The following is a reconciliation of EBITDA with Net income and Operating
income:
--------------------------------------------------------------------------------------------------------------------------------
Years ended December 31
($ millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Net income 1,122.5 700.3
Other expense (income) 28.0 18.4
Financing costs 504.7 623.1
Income taxes 351.0 322.0
Non-controlling interest 8.5 7.8
---------------------------------------------------------------------------------------------------------------------------------
Operating income 2,014.7 1,671.6
Depreciation 1,353.4 1,342.6
Amortization of intangible assets 222.2 281.1
---------------------------------------------------------------------------------------------------------------------------------
EBITDA 3,590.3 3,295.3
=================================================================================================================================
In addition to EBITDA, TELUS calculates EBITDA less capital expenditures as a
simple proxy for cash flow in its two reportable segments. EBITDA less capital
expenditures is used for comparison to the reported results for other
telecommunications companies and is subject to the potential comparability
issues of EBITDA described above. EBITDA less capital expenditures is
calculated for TELUS as follows:
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31
($ millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
EBITDA 3,590.3 3,295.3
Capital expenditures (Capex) (1,618.4) (1,319.0)
--------------------------------------------------------------------------------------------------------------------------------
EBITDA less capital expenditures 1,971.9 1,976.3
=================================================================================================================================
11.2 Free cash flow
The Company has issued guidance on and reports free cash flow because it is a
key measure used by management to evaluate its performance. Free cash flow
excludes certain working capital changes and other sources and uses of cash,
which are disclosed in the Consolidated statements of cash flows. Free cash
flow is not a calculation based on Canadian or U.S. GAAP and should not be
considered an alternative to the Consolidated statements of cash flows. Free
cash flow is a measure that can be used to gauge TELUS' performance over time.
Investors should be cautioned that free cash flow as reported by TELUS may not
be comparable in all instances to free cash flow as reported by other
companies. While the closest GAAP measure is Cash provided by operating
activities less Cash used by investing activities, free cash flow is
considered relevant because it provides an indication of how much cash
generated by operations is available after capital expenditures, but before
proceeds from divested assets and changes in certain working capital items
(such as trade receivables, which can be significantly distorted by
securitization changes that do not reflect operating results, and trade
payables).
The following reconciles free cash flow with Cash provided by operating
activities less Cash used by investing activities:
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31
($ millions) 2006 2005
---------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 2,803.7 2,914.6
Cash (used) by investing activities (1,675.2) (1,355.2)
--------------------------------------------------------------------------------------------------------------------------------
1,128.5 1,559.4
Net employee defined benefit plans expense 5.4 (3.9)
Employer contributions to employee defined benefit plans 123.3 118.8
Amortization of deferred gains on sale-leaseback of buildings,
amortization of deferred charges and other, net (51.7) (1.1)
Reduction (increase) in securitized accounts receivable -- (350.0)
Non-cash working capital changes except changes in taxes, interest
and securitized accounts receivable, and other 338.1 106.1
Acquisitions 49.0 29.4
Proceeds from the sale of property and other assets (14.9) (4.5)
Other investing activities 22.7 11.3
---------------------------------------------------------------------------------------------------------------------------------
Free cash flow (2006 definition) 1,600.4 1,465.5
Donations and securitization fees included in
Other expense (29.1) (14.6)
--------------------------------------------------------------------------------------------------------------------------------
Free cash flow (2007 definition) 1,571.3 1,450.9
=================================================================================================================================
The following shows management's calculation of free cash flow.
Years ended December 31
($ millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
EBITDA 3,590.3 3,295.3
Restructuring and workforce reduction costs net of cash payments (4.0) (13.6)
Share-based compensation 25.1 24.3
Cash interest paid (516.1) (638.3)
Cash interest received 24.2 47.3
Income taxes received (paid), less investment tax credits received that
were previously recognized in either EBITDA or capital expenditures, and other 99.3 69.5
Capital expenditures (1,618.4) (1,319.0)
--------------------------------------------------------------------------------------------------------------------------------
Free cash flow (2006 definition) 1,600.4 1,465.5
Donations and securitization fees included in
Other expense (29.1) (14.6)
--------------------------------------------------------------------------------------------------------------------------------
Free cash flow (2007 definition) 1,571.3 1,450.9
=================================================================================================================================
11.3 Definition of key operating indicators
These measures are industry metrics and are useful in assessing the operating
performance of a wireless company.
Average revenue per subscriber unit per month (ARPU) is calculated as Network
revenue divided by the average number of subscriber units on the network
during the period, and expressed as a rate per month. Data ARPU is a component
of ARPU, calculated on the same basis for revenues derived from services such
as text messaging, mobile computing, personal digital assistance devices,
Internet browser activity and pay-per-use downloads.
Churn per month is calculated as the number of subscriber units disconnected
during a given period divided by the average number of subscriber units on the
network during the period, and expressed as a rate per month. A prepaid
subscriber is disconnected when the subscriber has no usage for 90 days
following expiry of the prepaid card.
Cost of acquisition (COA) consists of the total of handset subsidies,
commissions, and advertising and promotion expenses related to the initial
subscriber acquisition during a given period. As defined, COA excludes costs
to retain existing subscribers (retention spend). COA for 2006 was
$532.6 million. COA for 2005 was $494.3 million.
COA per gross subscriber addition is calculated as cost of acquisition divided
by gross subscriber activations during the period.
EBITDA excluding COA is a measure of operational profitability normalized for
the period costs of adding new customers.
Retention spend to Network revenue represents direct costs associated with
marketing and promotional efforts aimed at the retention of the existing
subscriber base divided by Network revenue.
11.4 Definition of liquidity and capital resource measures
Dividend payout ratio is defined as the most recent quarterly dividend
declared per share multiplied by four and divided by basic earnings per share
for the 12-month trailing period. The target guideline for the annual dividend
payout ratio on a prospective basis, rather than on a trailing basis, is 45 to
55% of sustainable net earnings.
EBITDA excluding restructuring and workforce reduction costs is used for the
calculation of Net debt to EBITDA and EBITDA interest coverage, consistent
with the calculation of the Leverage Ratio and the Coverage Ratio in credit
facility covenants. Restructuring and workforce reduction costs were
$67.8 million and $53.9 million, respectively, for the years ended
December 31, 2006 and 2005.
EBITDA interest coverage is defined as EBITDA excluding restructuring divided
by Net interest cost. This measure is substantially the same as the Coverage
Ratio covenant in TELUS' credit facilities.
Funded debt, in general terms, is borrowed funds less cash on hand as defined
in the Company's bank agreements.
Interest coverage on long-term debt is calculated on a 12-month trailing basis
as Net income before interest expense on long-term debt and income tax expense
divided by interest expense on long-term debt. Interest expense on long-term
debt for the 12-month trailing period ending December 31, 2006 includes losses
on redemption of long-term debt. The 12-month periods ended December 31, 2006
and 2005 include accruals for estimated costs to settle a lawsuit.
Net debt is a non-GAAP measure whose nearest GAAP measure is the sum of
Long-term debt and Current maturities of long-term debt, as reconciled below.
The definition was changed in 2006 to include securitized accounts receivable,
which is closer to methods used by credit rating agencies. Net debt, before
addition of securitized accounts receivable and certain other minor
differences, is one component of a ratio used to determine compliance with
debt covenants (refer to the description of Net debt to EBITDA below).
At December 31
($ millions) 2006 2005
---------------------------------------------------------------------------------------------------------------------------------
Current maturities of long-term debt 1,434.4 5.0
Long-term debt 3,493.7 4,639.9
---------------------------------------------------------------------------------------------------------------------------------
4,928.1 4,644.9
Net deferred hedging liability 838.5 1,158.1
---------------------------------------------------------------------------------------------------------------------------------
Debt 5,766.6 5,803.0
Cash and temporary investments 11.5 (8.6)
Securitized accounts receivable 500.0 500.0
---------------------------------------------------------------------------------------------------------------------------------
Net debt 6,278.1 6,294.4
=================================================================================================================================
The deferred hedging liability in the table above relates to cross currency
interest rate swaps that effectively convert principal repayments and interest
obligations to Canadian dollar obligations in respect of the
U.S. $1,166.5 million debenture maturing June 1, 2007 and the
U.S. $1,925.0 million debenture maturing June 1, 2011. Management believes
that Net debt is a useful measure because it incorporates the exchange rate
impact of cross currency swaps put into place that fix the value of U.S.
dollar-denominated debt, and because it represents the amount of long-term
debt obligations that are not covered by available cash and temporary
investments.
Net debt to EBITDA is defined as Net debt as at the end of the period divided
by the 12-month trailing EBITDA excluding restructuring and workforce
reduction costs. TELUS' guideline range for Net debt to EBITDA is from 1.5 to
2.0 times. Historically, Net debt to EBITDA is substantially the same as the
Leverage Ratio covenant in TELUS' credit facilities.
Net debt to total capitalization provides a measure of the proportion of debt
used in the Company's capital structure. The long-term target ratio for Net
debt to total capitalization is 45 to 50%.
Net interest cost is defined as Financing costs before gains on redemption and
repayment of debt, calculated on a 12-month trailing basis. No gains on
redemption and repayment of debt were recorded in the respective periods.
Losses recorded on the redemption of long-term debt are included in net
interest cost. Net interest costs for the 12-months ending December 31, 2006
and 2005 are equivalent to reported quarterly financing costs over those
periods.
Total capitalization is calculated as follows:
At December 31
($ millions) 2006 2005
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Net debt 6,278.1 6,294.4
Non-controlling interests 23.6 25.6
Shareholders equity 6,928.1 6,870.0
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Total capitalization (book value) 13,229.8 13,190.0
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 1, 2007
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary