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 ___May___ 2006
(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:
First Quarter Results
dated May 3, 2006
CONSOLIDATED FINANCIAL STATEMENTS
and
MANAGEMENT'S DISUSSION AND ANALYSIS
_______________________________________________________________________________
TELUS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2006
_______________________________________________________________________________
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consolidated statements of income
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Three months
Periods ended March 31 (millions except per share amounts) 2006 2005
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OPERATING REVENUES $ 2,080.5 $ 1,974.7
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OPERATING EXPENSES
Operations 1,201.1 1,109.1
Restructuring and workforce reduction costs (Note 4) 16.7 9.4
Depreciation 339.2 329.9
Amortization of intangible assets 63.9 72.3
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1,620.9 1,520.7
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OPERATING INCOME 459.6 454.0
Other expense, net 4.3 1.5
Financing costs (Note 5) 127.0 138.4
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INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 328.3 314.1
Income taxes (Note 6) 116.1 70.3
Non-controlling interests 2.1 1.6
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NET INCOME AND COMMON SHARE AND NON-VOTING SHARE INCOME $ 210.1 $ 242.2
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INCOME PER COMMON SHARE AND NON-VOTING SHARE (Note 7)
- Basic $ 0.60 $ 0.67
- Diluted $ 0.60 $ 0.66
DIVIDENDS DECLARED PER COMMON SHARE AND NON-VOTING SHARE $ 0.275 $ 0.20
TOTAL WEIGHTED AVERAGE COMMON SHARES AND NON-VOTING SHARES OUTSTANDING
- Basic 349.3 360.2
- Diluted 352.9 367.9
The accompanying notes are an integral part of these interim consolidated financial statements
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consolidated statements of retained earnings
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Three months
Periods ended March 31 (millions) 2006 2005
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BALANCE AT BEGINNING OF PERIOD $ 849.7 $ 1,008.1
Net income 210.1 242.2
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1,059.8 1,250.3
Common Share and Non-Voting Share dividends paid, or payable, in cash (95.9) (72.3)
Purchase of Common Shares and Non-Voting Shares in excess of stated capital (Note 13(f)) (138.3) (89.9)
Adjustment for purchase of share options not in excess of their fair value 2.1 --
Adjustment of tax treatment of items charged directly to retained earnings 1.2 --
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BALANCE AT END OF PERIOD (Note 13) $ 828.9 $ 1,088.1
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The accompanying notes are an integral part of these interim consolidated financial statements
TELUS 2
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consolidated balance sheets
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March 31, December 31,
As at (millions) 2006 2005
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ASSETS
Current Assets
Cash and temporary investments, net $ -- $ 8.6
Accounts receivable (Notes 9, 15(b)) 610.3 610.3
Income and other taxes receivable -- 103.7
Inventories 151.0 138.8
Prepaid expenses and other (Note 15(b)) 243.2 154.7
Current portion of future income taxes 86.9 226.4
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1,091.4 1,242.5
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Capital Assets, Net (Note 10)
Property, plant, equipment and other 7,303.5 7,339.4
Intangible assets subject to amortization 589.9 637.5
Intangible assets with indefinite lives 2,965.8 2,964.6
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10,859.2 10,941.5
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Other Assets
Deferred charges (Note 15(b)) 884.3 850.2
Investments 27.9 31.2
Goodwill (Note 11) 3,155.0 3,156.9
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4,067.2 4,038.3
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$ 16,017.8 $ 16,222.3
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ 1.1 $ --
Accounts payable and accrued liabilities (Note 15(b)) 1,346.0 1,393.7
Income and other taxes payable 8.7 --
Restructuring and workforce reduction accounts payable and accrued liabilities (Note 4) 41.5 57.1
Advance billings and customer deposits (Note 15(b)) 575.4 571.8
Current maturities of long-term debt (Note 12) 75.5 5.0
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2,048.2 2,027.6
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Long-Term Debt (Note 12) 4,513.4 4,639.9
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Other Long-Term Liabilities (Note 15(b)) 1,636.9 1,635.3
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Future Income Taxes 997.3 1,023.9
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Non-Controlling Interests 27.7 25.6
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Shareholders' Equity (Note 13) 6,794.3 6,870.0
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$ 16,017.8 $ 16,222.3
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Commitments and Contingent Liabilities (Note 14)
The accompanying notes are an integral part of these interim consolidated financial statements
TELUS 3
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consolidated statements of cash flows
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Three months
Periods ended March 31 (millions) 2006 2005
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OPERATING ACTIVITIES
Net income $ 210.1 $ 242.2
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 403.1 402.2
Future income taxes 113.1 91.7
Share-based compensation 8.4 3.8
Net employee defined benefit plans expense (1.6) 1.5
Employer contributions to employee defined benefit plan (30.5) (37.4)
Restructuring and workforce reduction costs, net of cash payments (Note 4) (15.6) (12.3)
Amortization of deferred gains on sale-leaseback of buildings, amortization of
deferred charges and other, net 15.9 (4.4)
Net change in non-cash working capital(Note 15(c)) (29.8) 41.1
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Cash provided by operating activities 673.1 728.4
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INVESTING ACTIVITIES
Capital expenditures (Notes 10, 17) (320.5) (273.2)
Acquisition -- (27.5)
Proceeds from the sale of property and other assets 7.4 0.7
Change in non-current materials and supplies, purchase of investments and other (3.0) (6.2)
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Cash used by investing activities (316.1) (306.2)
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FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 33.2 87.9
Dividends to shareholders (95.9) --
Purchase of Common Shares and Non-Voting Shares for cancellation (Note 13(f)) (231.6) (158.3)
Long-term debt issued (Note 12) 180.6 --
Redemptions and repayment of long-term debt (Note 12) (253.0) (1.0)
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Cash used by financing activities (366.7) (71.4)
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CASH POSITION
Increase (decrease) in cash and temporary investments, net (9.7) 350.8
Cash and temporary investments, net, beginning of period 8.6 896.5
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Cash and temporary investments, net, end of period $ (1.1) $ 1,247.3
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SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest (paid) $ (13.1) $ (13.1)
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Interest received $ 22.5 $ 6.3
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Income taxes received (paid), net $ 95.7 $ (1.1)
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The accompanying notes are an integral part of these interim consolidated financial statements
TELUS 4
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notes to interim consolidated financial statements
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MARCH 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 provides data, Internet protocol, voice and wireless services to Central
and Eastern Canada.
Notes to consolidated financial statements Description
------------------------------------------------------------------------------------------------------------------------
1. Basis of presentation Summary explanation of basis of presentation of
interim consolidated financial statements
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2. Accounting policy developments Summary review of forthcoming generally accepted
accounting principle developments that may affect
the Company
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3. Financial instruments Summary schedule and review of financial instruments,
including fair values thereof
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4. Restructuring and workforce reduction costs Summary continuity schedules and review of restructuring
and workforce reduction costs
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5. Financing costs Summary schedule of items comprising financing costs by
nature
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6. Income taxes Summary reconciliations of statutory rate income tax
expense to provision for income taxes
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7. Per share amounts Summary schedules and review of numerators and
denominators used in calculating per share amounts
and related disclosures
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8. Share-based compensation Summary schedules and review of compensation arising
from share options, restricted stock units and employee
share purchase plan
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9. Accounts receivable Summary schedule and review of arm's-length
securitization trust transactions and related
disclosures
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10. Capital assets Summary schedule of items comprising capital assets
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11. Goodwill Summary schedule of goodwill and review of reported
fiscal year acquisitions from which goodwill arises
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12. Long-term debt Summary schedule of long-term debt and related
disclosures
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13. Shareholders' equity Summary schedules and review of shareholders' equity
and changes therein including share option price
stratification and normal course issuer bid summaries
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14. Commitments and contingent liabilities Summary review of contingent liabilities, labour
negotiations, commitments, lease obligations,
guarantees, claims and lawsuits
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15. Additional financial information Summary schedules of items comprising certain
primary financial statement line items
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16. Employee future benefits Summary and review of employee future benefits and
related disclosures
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17. Segmented information Summary disclosure of segmented information regularly
reported to the Company's chief operating decision
maker
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18. Differences between Canadian and United States Summary schedules and review of differences between
generally accepted accounting principles Canadian and United States generally accepted
accounting principles as they apply to the Company
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1 interim financial statements
(a) Basis of presentation
The notes presented in these interim consolidated financial statements include
only significant events and transactions and are not fully inclusive of all
matters normally disclosed in TELUS Corporation's annual audited financial
statements. As a result, these interim consolidated financial statements should
be read in conjunction with the TELUS Corporation audited consolidated
financial statements for the year ended December 31, 2005. These interim
consolidated financial statements follow the same accounting policies and
methods of their application as set out in the TELUS Corporation consolidated
financial statements for the year ended December 31, 2005, including that
certain of the comparative amounts have been reclassified to conform with the
presentation adopted currently.
TELUS 5
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notes to interim consolidated financial statements
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The term "Company" is used to mean TELUS Corporation and, where the
context of the narrative permits or requires, its subsidiaries.
2 accounting policy developments
(a) Earnings per share
Possibly commencing in the Company's 2006 fiscal year, proposed amendments to
the recommendations of the Canadian Institute of Chartered Accountants ("CICA")
for the calculation and disclosure of earnings per share (CICA Handbook Section
3500) may apply to the Company. These proposed amendments, in the Company's
specific instance, may result in the diluted earnings per share denominator
being adjusted, using the reverse treasury stock method, for the theoretical
issuance of shares from treasury to settle obligations arising from the
issuance of restricted stock units that have the possibility of equity
settlement; for purposes of the calculation the Company will be required to
assume that shares will be necessary to settle the obligation, and that the
shares will be issued from Treasury. Restricted stock units are further
described in Note 8(c). The restricted stock units issued by the Company that
do not have the possibility of equity settlement will not be affected by these
proposed amendments. The Company does not expect to be materially affected by
the proposed amendments to the recommendations.
(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 implementation at the beginning of a fiscal year; the Company will not
be implementing these recommendations in its 2006 fiscal year. The concept of
comprehensive income for purposes of Canadian GAAP will be to include changes
in shareholders' equity arising from unrealized changes in the values of
financial instruments. Comprehensive income as prescribed by U.S. GAAP, and
which is disclosed in Note 18(h), is largely aligned with comprehensive income
as prescribed by Canadian GAAP. In the Company's specific instance, however,
there is a difference in other comprehensive income in that U.S. GAAP currently
includes the concept of minimum pension liabilities and Canadian GAAP does not.
(c) Business combinations
Commencing with 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 of
January 1, 2007, or later. 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 on or after January 1, 2007.
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).
(d) Convergence with International Reporting Standards
In early 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.
During 2006, the Accounting Standards Board is expected to develop and publish
a detailed implementation plan with a transition period expected to be
approximately five years. As this convergence initiative is very much in its
infancy as of the date of these interim consolidated financial statements, it
would be premature to currently assess the impact of the initiative, if any, on
the Company.
3 financial instruments
During the first quarter of 2006, the Company entered into a hedging
relationship that fixes the Company's compensation cost arising from a specific
grant of restricted stock units; hedge accounting has been applied to this
relationship. Restricted stock units are further described in Note 8(c).
As at March 31, 2006, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rate on U.S.$28
million of fiscal 2006 purchase commitments; hedge accounting has been applied
to these foreign currency forward contracts, all of which relate to the
Wireless segment.
TELUS 6
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notes to interim consolidated financial statements
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In contemplation of the planned refinancing of the debt maturing June
1, 2007, as set out in Note 12, the Company has entered into forward starting
interest rate swap agreements, as at March 31, 2006, that have the effect of
fixing the underlying interest rate on up to $300 million of replacement debt.
Hedge accounting has been applied to these forward starting interest rate swap
agreements.
Fair value: The carrying value of cash and temporary investments,
accounts receivable, accounts payable, restructuring and workforce reduction
accounts payable, dividends 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 March 31, 2006 December 31, 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 8(c)) November 2008 $ 12.5 $ 17.6 $ 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 June 2006 $ -- $ 0.4 $ -- $ --
- To which hedge accounting
is not applied June 2006 $ -- $ 0.9 $ -- $ --
--------------------------------------------------------------------------------------------------------------------------------
Derivatives(1)(2) used to
manage interest rate risk
associated with planned
refinancing of debt maturing
June 1, 2007 June 2007 $ -- $ 1.4 $ -- $ --
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Liabilities
Long-term debt
Principal (Note 12) $ 4,588.9 $ 5,208.1 $ 4,644.9 $ 5,371.6
Derivatives(1)(2) used to
manage interest rate and
currency risks associated
with U.S. dollar
denominated debt June 2011 1,139.1 1,489.2 1,154.3 1,470.5
--------------------------------------------------------------------------------------------------------------------------------
$ 5,728.0 $ 6,697.3 $ 5,799.2 $ 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
- To which hedge accounting
is not applied March 2006 $ -- $ -- $ -- $ 0.4
--------------------------------------------------------------------------------------------------------------------------------
(1) Notional amount of all derivative financial instruments outstanding is $5,192.0 (December 31, 2005 - $4,904.8).
(2) Designated as cash flow hedging items.
TELUS 7
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notes to interim consolidated financial statements
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4 restructuring and workforce reduction costs
(a) Overview
Three-month periods ended
March 31 (millions) 2006 2005
---------------------------------------------------------------------------------------------------------------------------
General General
programs Office programs
initiated in closures and initiated
2006 contracting out prior to 2006 Total Total
---------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce
reduction costs
Workforce reduction
Voluntary $ 0.3 $ -- $ -- $ 0.3 $ --
Involuntary 13.2 2.6 -- 15.8 5.8
Lease termination -- -- -- -- 3.0
Other 0.4 0.2 -- 0.6 0.6
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13.9 2.8 -- 16.7 9.4
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Disbursements
Workforce reduction
Voluntary (Early Retirement
Incentive Plan, Voluntary
Departure Incentive Plan
and other) 0.3 15.1 -- 15.4 1.9
Involuntary and other 1.5 0.2 14.3 16.0 18.7
Lease termination -- -- 0.3 0.3 0.5
Other 0.4 0.2 -- 0.6 0.6
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2.2 15.5 14.6 32.3 21.7
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Expenses greater than (less than)
disbursements 11.7 (12.7) (14.6) (15.6) (12.3)
Change in restructuring and
workforce reduction accounts
payable and accrued liabilities
Balance, beginning of period -- 25.5 31.6 57.1 70.7
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Balance, end of period $ 11.7 $ 12.8 $ 17.0 $ 41.5 $ 58.4
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(b) Programs initiated in 2005
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 March 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 March 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 March 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 March 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.
TELUS 8
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notes to interim consolidated financial statements
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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.
Also arising from its competitive efficiency program, the Company
undertook an initiative for a departmental reorganization and reconfiguration,
resulting in integration and consolidation. Approximately 600 bargaining unit
employees may be affected by this initiative and 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).
Expenses under this initiative are expected to be recorded in the second
quarter of 2006, as affected employees were not required to select an option
until after March 31, 2006, and therefore the associated expenses were not
eligible for recording during the three-month period ended March 31, 2006.
Future costs will be incurred as the initiative continues.
Continuing with its competitive efficiency program for integration of
Wireline and Wireless operations, for the three-month period ended March 31,
2006, $3.8 million of restructuring and workforce reduction costs were recorded
in respect of this initiative and were included with general programs initiated
in 2006.
The Company's estimate of restructuring and workforce reduction costs
in 2006, arising from its competitive efficiency program, which includes the
office closures and contracting out and integration of Wireline and Wireless
operations, is not currently expected to exceed $100 million.
5 financing costs
Three months
Periods ended March 31 (millions) 2006 2005
--------------------------------------------------------------------------------
Interest on long-term debt $ 125.4 $ 157.8
Interest on short-term obligations and other 1.6 1.2
Foreign exchange 1.1 2.5
--------------------------------------------------------------------------------
128.1 161.5
Interest income
Interest on tax refunds -- (15.6)
Other interest income (1.1) (7.5)
--------------------------------------------------------------------------------
(1.1) (23.1)
--------------------------------------------------------------------------------
$ 127.0 $ 138.4
--------------------------------------------------------------------------------
TELUS 9
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notes to interim consolidated financial statements
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6 income taxes
Three months
Periods ended March 31 (millions) 2006 2005
--------------------------------------------------------------------------------
Current $ 3.0 $ (21.4)
Future 113.1 91.7
--------------------------------------------------------------------------------
$ 116.1 $ 70.3
--------------------------------------------------------------------------------
The Company's income tax expense differs from that calculated by
applying statutory rates for the following reasons:
Three-month periods ended March 31 ($ in millions) 2006 2005
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Basic blended federal and provincial tax at
statutory income tax rates $ 111.5 34.0% $ 108.7 34.6%
Share option award compensation 1.5 1.3
Tax rate differential on, and consequential
adjustments from, reassessment of prior
year tax issues (0.3) (11.3)
Change in estimates of available deductible
differences in prior years -- (36.0)
Other 0.5 2.4
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113.2 34.5% 65.1 20.7%
Large corporations tax 2.9 5.2
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Income tax expense per Consolidated Statements of
Income $ 116.1 35.4% $ 70.3 22.4%
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7 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 options
and, in the comparative period, warrants and shares issuable on conversion of
debentures.
The following tables present the reconciliations of the numerators and
denominators of the basic and diluted per share computations.
Three months
Periods ended March 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------
Net income $ 210.1 $ 242.2
Add: Interest charges applicable to convertible debentures, net of income tax effects -- 1.6
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Diluted Common Share and Non-Voting Share income $ 210.1 $ 243.8
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Three months
Periods ended March 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------
Basic total weighted average Common Shares and Non-Voting Shares outstanding 349.3 360.2
Effect of dilutive securities
Exercise of share options 3.6 3.5
Exercise of warrants -- 0.4
Exercise of convertible debentures conversion option -- 3.8
--------------------------------------------------------------------------------------------------------------------------
Diluted total weighted average Common Shares and Non-Voting Shares outstanding 352.9 367.9
--------------------------------------------------------------------------------------------------------------------------
For the three-month period ended March 31, 2006, certain outstanding
share options, in the amount of 1.1 million (2005 - 2.1 million) were not
included in the computation of diluted income per Common Share and Non-Voting
Share because the share options' exercise prices were greater than the average
market price of the Common Shares and Non-Voting Shares during the reported
periods.
TELUS 10
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notes to interim consolidated financial statements
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8 share-based compensation
(a) Details of share-based compensation expense
Reflected in the Consolidated Statements of Income as "Operations expense" are
the following share-based compensation amounts:
Three months
Periods ended March 31 (millions) 2006 2005
-------------------------------------------------------------------------------------------------------------------
Share option awards $ 4.5 $ 4.2
Restricted stock units 6.2 3.7
Employee share purchase plan 9.7 8.1
-------------------------------------------------------------------------------------------------------------------
Amounts recognized as Operations expense in consolidated statements of income 20.4 16.0
Less - Income tax benefit arising from share-based compensation (see Note 6) 5.4 4.1
-------------------------------------------------------------------------------------------------------------------
$ 15.0 $ 11.9
-------------------------------------------------------------------------------------------------------------------
(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 options
granted subsequent to 2004 have been cliff vesting awards.
Some share option awards have a net-equity settlement feature. As
discussed further in Note 13(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 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:
Three months
Periods ended March 31 2006 2005
--------------------------------------------------------------------------------
Share option award fair value (per share option) $ 12.35 $ 11.26
Risk free interest rate 4.0% 3.7%
Expected lives(1) (years) 4.6 4.5
Expected volatility 36.0% 40.0%
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 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 exercise price. Dividends are not
paid on unexercised share option awards and are not subject to vesting.
(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.
TELUS 11
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
Period ended March 31, 2006 Three months
--------------------------------------------------------------------------------------------------------------------------
Number of restricted Weighted
stock units average
-------------------------- grant date
Non-vested Vested fair value
--------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period
Non-vested 1,645,530 -- $ 32.16
Vested -- 62,437 26.43
Issued
Initial allocation 588,749 -- 43.83
In lieu of dividends 19,428 -- 44.86
Vested (899) 899 27.47
Settled in cash -- (51,537) 29.42
Forfeited and cancelled (17,216) -- 30.75
--------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period
Non-vested 2,235,592 -- 35.29
Vested -- 11,799 $ 15.51
===========================================================================================================================
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, as set out in the following table:
Cost fixed
to the
Number of Company per
restricted restricted
stock units stock unit
--------------------------------------------------------------------------------------------------------------------------
Issued in first quarter of 2004; cliff vesting in the fourth quarter of 2006 652,550 $ 26.61
Issued in first quarter of 2005; cliff vesting in the fourth quarter of 2007 600,000 $ 40.91
Issued in fourth quarter of 2005; cliff vesting in the fourth quarter of 2008 160,000 $ 50.91
Issued in first quarter of 2006; cliff vesting in the fourth quarter of 2008 440,000 $ 50.02
--------------------------------------------------------------------------------------------------------------------------
The following is a schedule of vesting of the Company's non-vested
restricted stock units outstanding as at March 31, 2006:
Number of
restricted
Years ending December 31 stock units
-------------------------------------------------------------------------------------------------------------------------
2006 699,786
2007 706,482
2008 829,324
-------------------------------------------------------------------------------------------------------------------------
2,235,592
=========================================================================================================================
(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%. There are no vesting requirements
and the Company records its contributions as a component of operating expenses.
Three months
Periods ended March 31 (millions) 2006 2005
-------------------------------------------------------------------------------------------------------------------------
Employee contributions $ 22.9 $ 18.8
Company contributions 9.7 8.1
-------------------------------------------------------------------------------------------------------------------------
$ 32.6 $ 26.9
-------------------------------------------------------------------------------------------------------------------------
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.
TELUS 12
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
(e) Unrecognized, non-vested share-based compensation
As at March 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 1.7 years
(December 31, 2005 - 2.3 years).
These disclosures are not likely to be representative of the effects on
reported net income for future periods for the following reasons:
o these amounts reflect an estimate of forfeitures;
o these amounts do not reflect any provision for future awards;
o these amounts do not reflect any provision changes in the intrinsic value
for vested restricted stock units; and
o for non-vested restricted stock units, these amounts reflect intrinsic
values as at the balance sheet dates.
As at (millions) March 31, December 31,
2006 2005
-------------------------------------------------------------------------------
Share option awards $ 39.2 $ 27.1
Restricted stock units(1) 51.9 31.8
-------------------------------------------------------------------------------
$ 91.1 $ 58.9
================================================================================
(1) 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.
9 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, and March 1,
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
has an initial term ending July 18, 2007. 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 March 31, 2006, the rating was A (low).
As at (millions) March 31, December 31,
2006 2005
----------------------------------------------------------------------------------------------------
Total managed portfolio $ 1,018.0 $ 1,129.3
Securitized receivables (459.4) (599.2)
Retained interest in receivables sold 51.7 80.2
----------------------------------------------------------------------------------------------------
Receivables held $ 610.3 $ 610.3
----------------------------------------------------------------------------------------------------
For the three-month period ended March 31, 2006, the Company recognized
losses of $0.8 million (2005 - $0.4 million) on the sale of receivables arising
from the securitization.
Cash flows from the securitization are as follows:
Three months
Periods ended March 31 (millions) 2006 2005
-------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, beginning of period $ 500.0 $ 150.0
Proceeds from new securitizations 75.0 --
Securitization reduction payments (175.0) --
-------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, end of period $ 400.0 $ 150.0
-------------------------------------------------------------------------------------------------------------
Proceeds from collections reinvested in revolving-period securitizations $ 890.0 $ 352.7
-------------------------------------------------------------------------------------------------------------
Proceeds from collections pertaining to retained interest $ 126.7 $ 54.5
-------------------------------------------------------------------------------------------------------------
TELUS 13
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
10 capital assets
(a) Capital assets, net
Accumulated
Depreciation and
Cost Amortization Net Book Value
---------------------------------------------------------------------------------------------------------------------------
As at (millions) March 31, December 31,
2006 2005
---------------------------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunications assets $ 17,379.4 $ 12,129.3 $ 5,250.1 $ 5,378.2
Assets leased to customers 736.7 567.6 169.1 176.1
Buildings and leasehold improvements 1,763.2 927.8 835.4 838.0
Office equipment and furniture 989.3 734.2 255.1 263.1
Assets under capital lease 18.4 6.9 11.5 12.4
Other 328.7 246.9 81.8 84.9
Land 46.4 -- 46.4 46.7
Assets under construction 628.6 -- 628.6 516.4
Materials and supplies 25.5 -- 25.5 23.6
---------------------------------------------------------------------------------------------------------------------------
21,916.2 14,612.7 7,303.5 7,339.4
---------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 362.9 121.6 241.3 246.7
Software 1,200.4 917.9 282.5 322.7
Access to rights-of-way and other 119.6 53.5 66.1 68.1
---------------------------------------------------------------------------------------------------------------------------
1,682.9 1,093.0 589.9 637.5
---------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 3,984.3 1,018.5 2,965.8 2,964.6
---------------------------------------------------------------------------------------------------------------------------
$ 27,583.4 $ 16,724.2 $ 10,859.2 $ 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.
Three months
Periods ended March 31 (millions) 2006 2005
---------------------------------------------------------------------------------------------------------------------------
Additions of intangible assets
- Subject to amortization $ 17.6 $ 38.0
- With indefinite lives 1.2 8.8
---------------------------------------------------------------------------------------------------------------------------
$ 18.8 $ 46.8
===========================================================================================================================
The following table presents items included in capital expenditures.
Three months
Periods ended March 31 (millions) 2006 2005
---------------------------------------------------------------------------------------------------------------------------
Capitalized internal labour costs $ 68.8 $ 64.0
===========================================================================================================================
(b) Intangible assets subject to amortization
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at March 31, 2006, for each
of the next five fiscal years is as follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------
2006 (balance of year) $ 158.3
2007 132.9
2008 45.7
2009 8.7
2010 8.0
TELUS 14
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
11 goodwill
Period ended March 31, 2006 (millions) Three months
---------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 3,156.9
Foreign exchange on goodwill of self-sustaining foreign operations 0.1
Other (2.0)
---------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 3,155.0
===========================================================================================================================
12 long-term debt
(a) Details of long-term debt
As at ($ in millions)
March 31, December 31,
Series Rate of interest Maturity 2006 2005
---------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Notes
U.S. (2) 7.5%(1) June 2007 $ 1,360.8 $ 1,354.4
U.S. (3) 8.0%(1) June 2011 2,240.6 2,230.6
---------------------------------------------------------------------------------------------------------------------------
3,601.4 3,585.0
---------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Credit Facilities 5.50% May 2008 71.0 142.0
---------------------------------------------------------------------------------------------------------------------------
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 16.7% and
maturing on various dates up to 2013 11.6 12.5
---------------------------------------------------------------------------------------------------------------------------
Other 5.9 6.4
---------------------------------------------------------------------------------------------------------------------------
Total debt 4,588.9 4,644.9
Less - current maturities 75.5 5.0
---------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 4,513.4 $ 4,639.9
===========================================================================================================================
(1) Interest is payable semi-annually.
(2) Principal face value of notes is U.S.$1,166.5 million (December 31, 2005 - U.S.$1,166.5 million).
(3) Principal face value of notes is U.S.$1,925.0 million (December 31, 2005 - U.S.$1,925.0 million).
(b) Long-term debt maturities
Anticipated requirements to meet long-term debt repayments, calculated upon
such long-term debts owing as at March 31, 2006, during each of the five years
ending December 31 are as follows:
(millions) Total(1)
---------------------------------------------------------------------------------------------------------------------------
2006 (balance of year) $ 3.6
2007 1,873.4
2008 76.5
2009 1.5
2010 81.7
(1) Where applicable, repayments reflect hedged foreign exchange rates.
TELUS 15
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
13 shareholders' equity
(a) Details of shareholders' equity
March 31, December 31,
As at ($ 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) $ 2,295.5 $ 2,311.6
Non-Voting Shares (b) 3,515.8 3,556.7
---------------------------------------------------------------------------------------------------------------------------
5,811.3 5,868.3
---------------------------------------------------------------------------------------------------------------------------
Options (c) 5.0 5.9
Cumulative foreign currency translation adjustment (6.6) (7.3)
Retained earnings 828.9 849.7
Contributed surplus (d) 155.7 153.4
---------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 6,794.3 $ 6,870.0
===========================================================================================================================
(b) Changes in Common Shares and Non-Voting Shares
Period ended March 31, 2006 ($ in millions) Three months
---------------------------------------------------------------------------------------------------------------------------
Number of
shares Share capital
---------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 183,530,655 $ 2,311.6
Common Shares issued pursuant to exercising of share options (e) 180,121 6.3
Purchase of shares for cancellation pursuant to normal course issuer bid (f) (1,783,300) (22.4)
---------------------------------------------------------------------------------------------------------------------------
End of period 181,927,476 $ 2,295.5
---------------------------------------------------------------------------------------------------------------------------
Non-Voting Shares
Beginning of period 166,566,504 $ 3,556.7
Non-Voting Shares issued pursuant to exercising of share options (e) 1,131,988 29.8
Non-Voting Shares issued pursuant to use of share option award net-equity settlement
feature (e) 37,210 0.2
Purchase of shares for cancellation pursuant to normal course issuer bid (f) (3,334,500) (70.9)
---------------------------------------------------------------------------------------------------------------------------
End of period 164,401,202 $ 3,515.8
===========================================================================================================================
Amounts credited to the Common Share capital account upon exercise of share
options is cash received. Amounts credited to the Non-Voting Share capital
account are comprised as follows:
Period ended March 31, 2006 (millions) Three months
---------------------------------------------------------------------------------------------------------------------------
Non-Voting Shares issued pursuant to exercising of share options
Cash received from share option exercises $ 26.9
Amounts credited to share capital arising from intrinsic value accounting applied to
former Clearnet Communications Inc. options (c) 0.8
Share option award expense reclassified from contributed surplus upon exercise of share
options (d) 2.1
---------------------------------------------------------------------------------------------------------------------------
$ 29.8
===========================================================================================================================
(c) Options
Upon its acquisition of Clearnet Communications Inc. in 2000, the Company was
required to record the intrinsic value of Clearnet Communications Inc. options
outstanding at that time. As these options are exercised, the corresponding
intrinsic values are reclassified to share capital. As these options are
forfeited, or as they expire, the corresponding intrinsic values are
reclassified to contributed surplus. Proceeds arising from the exercise of these
options are credited to share capital.
TELUS 16
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
(d) Contributed surplus
The following table presents a summary of the activity related to the Company's
contributed surplus for the three-month period ended March 31.
Period ended March 31, 2006 (millions) Three months
---------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 153.4
Share option award expense recognized in period (Note 8) 4.5
Share option award expense reclassified to Non-Voting Share capital account upon exercise of share options (2.1)
Share option award expense reclassified to Non-Voting Share capital account upon use of share option award
net-equity settlement feature (0.2)
Amounts credited to contributed surplus arising from intrinsic value accounting applied to former Clearnet
Communications Inc. options (c) 0.1
---------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 155.7
===========================================================================================================================
(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 three-month period ended March 31.
Period ended March 31, 2006 Three months
---------------------------------------------------------------------------------------------------------------------------
Number of Weighted
share average share
options option price
---------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 13,894,601 $ 28.14
Granted 1,500,919 43.04
Exercised(1) (1,366,527) 24.92
Forfeited (217,523) 25.84
---------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 13,811,470 $ 30.12
===========================================================================================================================
(1) The total intrinsic value of share options exercised for the three-month period ended March 31,
2006, was $29.2 million.
In 2006, certain outstanding grants of share option awards, which were
awarded 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. 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. The following table
reconciles the number of share options exercised and the associated number of
Common Shares and Non-Voting Shares issued.
Period ended March 31, 2006 Three months
---------------------------------------------------------------------------------------------------------------------------
Non-Voting Shares issued pursuant to share options 1,131,988
Non-Voting Shares issued pursuant to net-equity settlement feature 37,210
Impact of Company choosing to settle share option exercises using net-equity settlement feature 17,208
---------------------------------------------------------------------------------------------------------------------------
Non-Voting Shares issuable pursuant to exercising of share option awards 1,186,406
Common Shares issued and issuable pursuant to exercising of share option awards 180,121
---------------------------------------------------------------------------------------------------------------------------
Share option awards exercised 1,366,527
===========================================================================================================================
TELUS 17
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
The following is an option life and exercise price stratification of the
Company's share options outstanding as at March 31, 2006.
Options outstanding(1) Options exercisable
------------------------------------------------------------------------------------------------------- ------------------------
Range of option prices Number Weighted
of average
Total shares price
------------------------------------------------------------------------------------------------------- ----------- ------------
Low $ 5.95 $ 9.08 $ 14.63 $ 21.99 $ 34.88 $ 5.95
High $ 8.43 $ 13.56 $ 19.92 $ 32.83 $ 46.75 $ 46.75
Year of expiry and
number of shares:
----------------------------------------------------------------------------------------------------------------
2006 3,272 -- -- -- -- 3,272 3,272 $ 8.14
2007 2,959 9,562 3,937 120,266 -- 136,724 136,724 $ 28.67
2008 3,272 -- 84,100 136,800 224,172 224,172 $ 40.08
2009 -- 169,962 1,010,666 182,909 210,400 1,573,937 1,573,937 $ 20.07
2010 -- -- 165,426 2,140,386 616,922 2,922,734 991,753 $ 31.86
2011 -- -- 9,224 2,902,612 2,245,868 5,157,704 3,605,406 $ 30.89
2012 26,966 23,133 334,200 75,000 1,833,673 2,292,972 459,299 $ 16.67
2013 -- -- -- -- 1,499,955 1,499,955 -- $ --
----------------------------------------------------------------------------------------------------------------
36,469 202,657 1,523,453 5,505,273 6,543,618 13,811,470 6,994,563 $ 27.90
================================================================================================================
Weighted average remaining
contractual life (years) 5.1 3.7 4.4 4.8 5.6 5.1
Weighted average price $ 8.05 $ 13.00 $ 16.07 $ 24.77 $ 38.55 $ 30.12
Aggregate intrinsic
value(2) (millions) $ 1.4 $ 6.5 $ 44.3 $ 112.6 $ 44.2 $ 209.0
-------------------------------------------------------------------------------------------------------
Options exercisable
-------------------------------------------------------------------------------------------------------
Number of shares 36,469 202,657 1,507,479 2,037,968 3,209,990 6,994,563
Weighted average remaining
contractual life (years) 5.1 3.7 4.4 4.9 4.5 4.6
Weighted average price $ 8.05 $ 13.00 $ 16.05 $ 25.44 $ 36.19 $ 27.90
Aggregate intrinsic
value(2)(millions) $ 1.4 $ 6.5 $ 43.9 $ 40.5 $ 29.5 $ 121.8
-------------------------------------------------------------------------------------------------------
(1) As at March 31, 2006, 13,606,429 share options, with a weighted average
remaining contractual life of 5.1 years, a weighted average price of $29.94
and an aggregate intrinsic value of $208.2 million, are vested or were
expected to vest.
(2) The aggregate intrinsic value is calculated upon March 31, 2006, per share
prices of $45.82 for Common Shares and $45.17 for Non-Voting Shares.
As at March 31, 2006, 1.3 million Common Shares and 20.9 million Non-Voting
Shares were reserved for issuance, from Treasury, under the share option plans.
(f) Purchase of shares for cancellation pursuant to normal course issuer bid
The Company purchased, for cancellation, Common Shares and Non-Voting
Shares pursuant to a normal course issuer bid that runs for a twelve-month
period ending December 19, 2006, for up to 12.0 million Common Shares and 12.0
million Non-Voting Shares. The excess of the purchase price over the average
stated value of shares purchased for cancellation was charged to retained
earnings. The Company ceases to consider shares outstanding on the date of the
Company's purchase of its shares although the actual cancellation of the shares
by the transfer agent and registrar occurs on a timely basis on a date shortly
thereafter. As at March 31, 2006, 230,000 Common Shares and 230,000 Non-Voting
Shares had been purchased and not yet cancelled.
Three-month period ended March 31, 2006 ($ in millions)
---------------------------------------------------------------------------------------------------------------------------
Purchase price
---------------------------------------------------
Charged to
Number of Charged to retained
shares Paid share capital earnings
--------------------------------------------------------------------------------------------------------------------------
Common Shares purchased for cancellation
Prior to beginning of period 634,469 $ 29.7 $ 8.0 $ 21.7
During current period 1,783,300 83.4 22.4 61.0
--------------------------------------------------------------------------------------------------------------------------
Cumulative total 2,417,769 $ 113.1 $ 30.4 $ 82.7
==========================================================================================================================
Non-Voting Shares purchased for cancellation
Prior to beginning of period 607,700 $ 27.8 $ 12.9 $ 14.9
During current period 3,334,500 148.2 70.9 77.3
--------------------------------------------------------------------------------------------------------------------------
Cumulative total 3,942,200 $ 176.0 $ 83.8 $ 92.2
==========================================================================================================================
TELUS 18
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
Three-month peiod ended March 31, 2006 ($ in millions)
---------------------------------------------------------------------------------------------------------------------------
Purchase price
---------------------------------------------------
Charged to
Number of Charged to retained
shares Paid share capital earnings
--------------------------------------------------------------------------------------------------------------------------
Common Shares and Non-Voting Shares purchased
for cancellation
Prior to beginning of period 1,242,169 $ 57.5 $ 20.9 $ 36.6
During current period 5,117,800 231.6 93.3 138.3
--------------------------------------------------------------------------------------------------------------------------
Cumulative total 6,359,969 $ 289.1 $ 114.2 $ 174.9
==========================================================================================================================
(g) 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 three-month period ended March 31, 2006, 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 three-month period ended March 31, 2006, $2.2 million (2005 - $1.9 million)
was to be reinvested in Non-Voting Shares.
14 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 Canadian Radio-television and
Telecommunications Commission 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, a liability of $163.3
million as at March 31, 2006 (December 31, 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 Canadian Radio-television and Telecommunications Commission, upon
its periodic review of the Company's deferral account, disagrees with
management's estimates and assumptions, the Canadian Radio-television and
Telecommunications Commission may adjust the deferral account balance and such
adjustment may be material. Ultimately, this process results in the Canadian
Radio-television and Telecommunications Commission determining if, and when, the
deferral account liability is settled.
On March 24, 2004, the Canadian Radio-television and Telecommunications
Commission 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 Canadian Radio-television and Telecommunications
Commission issued Decision CRTC 2006-9, "Disposition of funds in the deferral
account". In its decision the Canadian Radio-television and Telecommunications
Commission 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 5 per cent
of the accumulated deferral account balance must be used for initiatives that
enhance accessibility to telecommunication 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 Canadian Radio-television and Telecommunications Commission
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.
TELUS 19
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
Due to the Company's use of the liability method of accounting for the
deferral account, the Canadian Radio-television and Telecommunications
Commission Decision 2005-6, as it relates to the Company's provision of
Competitor Digital Network services, is not expected to affect the Company's
revenues. To the extent that the Canadian Radio-television and
Telecommunications Commission Decision 2005-6 requires the Company to provide
discounts on Competitor Digital Network services, both for current and prior
periods, the Company draws down the deferral account by an offsetting amount.
For the three-month period ended March 31, 2006, the Company drew down the
deferral account by $12.9 million (2005 - $18.4 million) in respect of discounts
on Competitor Digital Network services.
(b) 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 March 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 telecommunication 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
March 31, 2006, the Company has a liability of $0.5 million (December 31, 2005 -
$0.5 million) recorded in respect of these lease guarantees.
The following table quantifies the maximum undiscounted guarantee amounts
as at March 31, 2006, without regard for the likelihood of having to make such
payment.
(millions) Performance Financial
guarantees(1) guarantees(1) Total
--------------------------------------------------------------------------------
2006 $ 1.7 $ 1.1 $ 2.8
2007 1.0 0.6 1.6
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 obligationsIn 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 Canadian Radio-television and Telecommunications Commission
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 Canadian Radio-television and
Telecommunications Commission 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 March 31, 2006, the Company has no liability recorded in respect of
indemnification obligations.
TELUS 20
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
(c) 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. The class has not been certified. The Company
believes that it has good defences to the action.
Similar proceedings have been filed by, or on behalf of, plaintiffs'
counsel in other provincial jurisdictions, but will not proceed until the
Saskatchewan action has been decided.
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.
TELUS 21
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
15 additional financial information
(a) Income statement
Three months
Periods ended March 31 (millions) 2006 2005
--------------------------------------------------------------------------------
Operations expense(1):
Cost of sales and service $ 660.4 $ 616.5
Selling, general and administrative 540.7 492.6
-------------------------------------------------------------------------------
$ 1,201.1 $ 1,109.1
===============================================================================
Advertising expense $ 54.0 $ 37.0
===============================================================================
(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 telecommunication
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
March 31, December 31,
As at (millions) 2006 2005
-----------------------------------------------------------------------------------------------------------
Accounts receivable
Customer accounts receivable $ 470.3 $ 451.1
Accrued receivables - customer 88.7 113.2
Allowance for doubtful accounts (56.2) (57.2)
-----------------------------------------------------------------------------------------------------------
502.8 507.1
Accrued receivables - other 100.0 94.3
Other 7.5 8.9
-----------------------------------------------------------------------------------------------------------
$ 610.3 $ 610.3
-----------------------------------------------------------------------------------------------------------
Prepaid expense and other
Prepaid expenses $ 141.0 $ 87.7
Deferred customer activation and connection costs 63.8 66.4
Other 38.4 0.6
-----------------------------------------------------------------------------------------------------------
$ 243.2 $ 154.7
-----------------------------------------------------------------------------------------------------------
Deferred charges
Recognized transitional pension assets and pension plan
contributions in excess of charges to income $ 722.2 $ 687.9
Deferred customer activation and connection costs 108.0 104.4
Cost of issuing debt securities, less amortization 22.1 23.5
Other 32.0 34.4
-----------------------------------------------------------------------------------------------------------
$ 884.3 $ 850.2
-----------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities
Accrued liabilities $ 487.9 $ 508.6
Payroll and other employee-related liabilities 312.7 388.7
Asset retirement obligations 4.1 4.1
-----------------------------------------------------------------------------------------------------------
804.7 901.4
Trade accounts payable 327.1 394.4
Interest payable 163.1 54.8
Other 51.1 43.1
-----------------------------------------------------------------------------------------------------------
$ 1,346.0 $ 1,393.7
-----------------------------------------------------------------------------------------------------------
Advance billings and customer deposits
Advance billings $ 328.7 $ 322.4
Regulatory deferral accounts (Note 14(a)) 163.3 158.7
Deferred customer activation and connection fees 63.8 66.4
Customer deposits 19.6 24.3
-----------------------------------------------------------------------------------------------------------
$ 575.4 $ 571.8
===========================================================================================================
TELUS 22
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
March 31, December 31,
As at (millions) 2006 2005
-----------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities
Deferred hedging liability $ 1,139.1 $ 1,154.3
Pension and other post-retirement liabilities 191.3 189.1
Deferred customer activation and connection fees 108.0 104.4
Deferred gain on sale-leaseback of buildings 78.7 81.1
Asset retirement obligations 28.9 28.9
Other 90.9 77.5
-----------------------------------------------------------------------------------------------------------
$ 1,636.9 $ 1,635.3
===========================================================================================================
(c) Supplementary cash flow information
Three months
Periods ended March 31 (millions) 2006 2005
-----------------------------------------------------------------------------------------------------------
Net change in non-cash working capital
Accounts receivable $ -- $ (2.2)
Inventories (12.2) 22.3
Prepaid expenses and other (88.5) (62.4)
Accounts payable and accrued liabilities (45.1) 122.9
Income and other taxes receivable and payable, net 112.4 (40.2)
Advance billings and customer deposits 3.6 0.7
-----------------------------------------------------------------------------------------------------------
$ (29.8) $ 41.1
===========================================================================================================
16 employee future benefits
(a) Defined benefit plans
The Company's net defined benefit plan costs were as follows:
Three-month periods ended March 31
(millions) 2006 2005
------------------------------------------------------------------------------------- ----------------------------------------
Incurred Matching Recognized Incurred Matching Recognized
in period adjustments(1) in period in period adjustments(1) in period
--------------------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Current service cost $ 24.3 $ -- $ 24.3 $ 17.1 $ -- $ 17.1
Interest cost 78.9 -- 78.9 79.8 -- 79.8
Return on plan assets (267.1) 155.8 (111.3) (122.9) 24.8 (98.1)
Past service costs -- 0.2 0.2 -- 0.2 0.2
Actuarial loss (gain) 10.5 -- 10.5 5.0 -- 5.0
Valuation allowance provided against
accrued benefit asset -- 6.5 6.5 -- 6.4 6.4
Amortization of transitional asset -- (11.2) (11.2) -- (11.2) (11.2)
--------------------------------------------------------------------------------------------------------------------------------
$ (153.4) $ 151.3 $ (2.1) $ (21.0) $ 20.2 $ (0.8)
================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
Three-month periods ended March 31
(millions) 2006 2005
------------------------------------------------------------------------------------- ----------------------------------------
Incurred Matching Recognized Incurred Matching Recognized
in period adjustments(1) in period in period adjustments(1) in period
--------------------------------------------------------------------------------------------------------------------------------
Other benefit plans
Current service cost $ 0.9 $ -- $ 0.9 $ 2.8 $ -- $ 2.8
Interest cost 0.5 -- 0.5 0.5 -- 0.5
Return on plan assets (0.6) -- (0.6) (0.6) -- (0.6)
Actuarial loss (gain) (0.5) -- (0.5) (0.7) -- (0.7)
Amortization of transitional obligation -- 0.2 0.2 -- 0.2 0.2
--------------------------------------------------------------------------------------------------------------------------------
$ 0.3 $ 0.2 $ 0.5 $ 2.0 $ 0.2 $ 2.2
================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
TELUS 23
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
(b) Defined contribution plans
The Company's total defined contribution pension plan costs recognized were
as follows:
Three months
Periods ended March 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Union pension plan and public service pension plan contributions $ 8.7 $ 10.7
Other defined contribution pension plans 4.9 3.7
--------------------------------------------------------------------------------------------------------------------------------
$ 13.6 $ 14.4
================================================================================================================================
17 segmented information
The Company's reportable segments are Wireline and Wireless. The Wireline
segment includes voice local, voice long distance, data and other
telecommunication 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).
Three-month periods ended Wireline Wireless Eliminations Consolidated
March 31
(millions) 2006 2005 2006 2005 2006 2005 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Operating revenues
External revenue $1,198.6 $1,222.2 $ 881.9 $ 752.5 $ -- $ -- $2,080.5 $1,974.7
Intersegment revenue 23.5 22.6 5.9 5.8 (29.4) (28.4) -- --
--------------------------------------------------------------------------------------------------------------------------------
1,222.1 1,244.8 887.8 758.3 (29.4) (28.4) 2,080.5 1,974.7
--------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Operations expense 740.4 716.6 490.1 420.9 (29.4) (28.4) 1,201.1 1,109.1
Restructuring and
work-force reduction
costs 14.9 9.4 1.8 -- -- -- 16.7 9.4
--------------------------------------------------------------------------------------------------------------------------------
755.3 726.0 491.9 420.9 (29.4) (28.4) 1,217.8 1,118.5
--------------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $ 466.8 $ 518.8 $ 395.9 $ 337.4 $ -- $ -- $ 862.7 $ 856.2
--------------------------------------------------------------------------------------------------------------------------------
CAPEX(2) $ 259.0 $ 213.6 $ 61.5 $ 59.6 $ -- $ -- $ 320.5 $ 273.2
--------------------------------------------------------------------------------------------------------------------------------
EBITDA less CAPEX $ 207.8 $ 305.2 $ 334.4 $ 277.8 $ -- $ -- $ 542.2 $ 583.0
--------------------------------------------------------------------------------------------------------------------------------
EBITDA (from above) $ 862.7 $ 856.2
Depreciation 339.2 329.9
Amortization 63.9 72.3
----------------------------------------------------
Operating income 459.6 454.0
Other expense, net 4.3 1.5
Financing costs 127.0 138.4
----------------------------------------------------
Income before income taxes
and non-controlling
interests 328.3 314.1
Income taxes 116.1 70.3
Non-controlling interests 2.1 1.6
----------------------------------------------------
Net income $ 210.1 $ 242.2
====================================================
(1) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") is
a non-GAAP measure and 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").
TELUS 24
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
18 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:
Three months
Periods ended March 31 (millions except per share amounts) 2006 2005
----------------------------------------------------------------------------------------------------------------------------
(restated-(b))
Net income in accordance with Canadian GAAP $ 210.1 $ 242.2
Adjustments:
Operating expenses
Operations (b) (4.2) (4.2)
Amortization of intangible assets (c) (13.1) (20.5)
Financing costs (e) -- 0.9
Accounting for derivatives (f) 1.8 3.4
Taxes on the above adjustments (g) 5.3 7.1
----------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP 199.9 228.9
Other comprehensive income (loss) (h)
Foreign currency translation adjustment 0.7 (3.1)
Change in unrealized fair value of derivatives designated as cash flow hedges (23.1) (108.4)
Change in minimum pension liability (1.4) (0.7)
----------------------------------------------------------------------------------------------------------------------------
(23.8) (112.2)
----------------------------------------------------------------------------------------------------------------------------
Comprehensive income in accordance with U.S. GAAP $ 176.1 $ 116.7
============================================================================================================================
Net income in accordance with U.S. GAAP per Common Share and Non-Voting Share
- Basic $ 0.57 $ 0.64
- Diluted $ 0.57 $ 0.60
The following is an analysis of retained earnings (deficit) reflecting the
application of U.S. GAAP:
Three months
Periods ended March 31 (millions except per share amounts) 2006 2005
----------------------------------------------------------------------------------------------------------------------------
(restated-(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 options (b) -- (185.5)
--------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance (785.5) (775.7)
Net income in accordance with U.S. GAAP 199.9 228.9
--------------------------------------------------------------------------------------------------------------------------
(585.6) (546.8)
Common Share and Non-Voting Share dividends paid, or payable, in cash (95.9) (72.3)
Purchase of Common Shares and Non-Voting Shares in excess of stated capital (95.3) (34.4)
Adjustment to purchase of share options not in excess of their fair value 2.1 --
--------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (774.7) $ (653.5)
==========================================================================================================================
TELUS 25
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
The following is an analysis of major balance sheet categories reflecting
the application of U.S. GAAP:
As at (millions) March 31, December 31,
2006 2005
-----------------------------------------------------------------------------------------------------------------------------
Current Assets $ 1,091.4 $ 1,242.5
Capital Assets
Property, plant, equipment and other 7,303.5 7,339.4
Intangible assets subject to amortization 2,234.5 2,295.2
Intangible assets with indefinite lives 2,965.8 2,964.6
Goodwill 3,573.6 3,575.5
Other Assets 747.8 736.3
-----------------------------------------------------------------------------------------------------------------------------
$ 17,916.6 $ 18,153.5
-----------------------------------------------------------------------------------------------------------------------------
Current Liabilities $ 2,048.2 $ 2,027.5
Long-Term Debt 4,513.4 4,639.9
Other Long-Term Liabilities 2,046.7 2,024.9
Deferred Income Taxes 1,366.2 1,410.8
Non-Controlling Interest 27.7 25.6
Shareholders' Equity 7,914.4 8,024.8
-----------------------------------------------------------------------------------------------------------------------------
$ 17,916.6 $ 18,153.5
=============================================================================================================================
The following is a reconciliation of shareholders' equity incorporating the
differences between Canadian and U.S. GAAP:
Shareholders' Equity
-----------------------------------------------------------------------------------------------
Cumulative
foreign Accumulated
Non- Options Retained currency other
Common Voting and earnings translation comprehensive Contributed
As at March 31, 2006 (millions) Shares Shares warrants (deficit) adjustment income (loss) surplus Total
----------------------------------------------------------------------------------------------------------------------------------
Under Canadian GAAP $ 2,295.5 $3,515.8 $ 5.0 $ 828.9 $ (6.6) $ - $155.7 $6,794.3
Adjustments:
Merger of BC TELECOM and
TELUS (a), (c), (d) 1,807.9 1,045.7 - (1,465.1) - - - 1,388.5
Share-based compensation (b) 8.3 55.7 - (135.6) - - 71.6 -
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) - - - 0.9 - - - 0.9
Accumulated other comprehensive
income (loss)(h) - - - - 6.6 (399.4) - (392.8)
----------------------------------------------------------------------------------------------------------------------------------
Under U.S. GAAP $ 4,111.7 $4,745.7 $ 5.0 $ (774.7) $ - $(399.4) $226.1 $7,914.4
==================================================================================================================================
TELUS 26
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
Shareholders' Equity (restated-(b))
-----------------------------------------------------------------------------------------------
Cumulative
foreign Accumulated
Non- Options Retained currency other
Common Voting and earnings translation comprehensive Contributed
As at March 31, 2006 (millions) Shares Shares warrants (deficit) adjustment income (loss) surplus 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
Three months
Periods ended March 31 (millions) 2006 2005
--------------------------------------------------------------------------------
Future employee benefits $ (4.2) $ (4.2)
================================================================================
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.
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 8(b).
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 options granted to
employees. The Company has selected the modified-retrospective transition method
and such method results in share option expense being recognized in net
income in accordance with U.S. GAAP in fiscal years prior to 2006. The share
option expense that is recognized in fiscal years subsequent to 2005 is in
respect of share options 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. As share options granted
subsequent to 1994 and prior to 2002 are captured
TELUS 27
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
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;
Three-month period ended March 31 (millions except per share amounts) 2005
----------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP
As previously reported $ 233.1
Deduct: Share-based compensation arising from share option awards determined under
fair value based method for all awards(1) (4.2)
----------------------------------------------------------------------------------------------------------------------
As currently reported $ 228.9
----------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP per Common Share and Non-Voting Share
Basic
As previously reported (using intrinsic value
method) $ 0.65
As currently reported (using fair value method) $ 0.64
Diluted
As previously reported (using intrinsic value
method) $ 0.64
As currently reported (using fair value method) $ 0.62
(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 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 options
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 -- 26.1 -- (58.4) -- 32.3 --
recognized as at December 31, 2005
Cumulative transition adjustment
for share-based compensation (and
associated effects) arising from
share options 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 7.4 76.4 -- (195.6) -- 111.8 --
amounts
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 options 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.
TELUS 28
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
To reflect the fair value of 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:
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 options
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 -- 15.1 -- (44.2) -- 29.1 --
recognized as at December 31, 2004
Cumulative transition adjustment
for share-based compensation (and
associated effects) arising from
share options 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 3.4 25.6 -- (185.5) -- 156.5 --
amounts
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 options 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.
(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
Cost Amortization Net Book Value
--------------------------------------------------------------------------------------------------------------------------
As at (millions) March 31, December 31,
2006 2005
--------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers - wireline $ 1,950.0 $ 305.4 $ 1,644.6 $ 1,692.6
Subscribers - wireless 250.0 250.0 -- 46.9
--------------------------------------------------------------------------------------------------------------------------
2,200.0 555.4 1,644.6 1,739.5
--------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 1,833.3 1,833.3 -- --
--------------------------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,388.7 $ 1,644.6 $ 1,739.5
==========================================================================================================================
(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 March 31, 2006, for each
of the next five fiscal years is as follows:
Years ending December 31 (millions)
-------------------------------------------------------------------------------
2006 (balance of year) $ 187.1
2007 171.3
2008 84.1
2009 47.1
2010 46.4
TELUS 29
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
(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. 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
Three months
Periods ended March 31 (millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------
Current $ 3.0 $ (21.4)
Deferred 107.8 84.6
--------------------------------------------------------------------------------------------------------------------------
$ 110.8 $ 63.2
==========================================================================================================================
The Company's income tax expense (recovery), for U.S. GAAP purposes,
differs from that calculated by applying statutory rates for the following
reasons:
Three-month periods ended March 31 ($ in millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 106.2 34.0% $ 101.8 34.6%
Share option award compensation 1.5 1.3
Tax rate differential on, and consequential
adjustments from, reassessment of prior
year tax issues (0.3) (11.3)
Change in estimates of available deductible
differences in prior years -- (36.0)
Other 0.5 2.2
--------------------------------------------------------------------------------------------------------------------------
107.9 34.5% 58.0 19.5%
Large corporations tax 2.9 5.2
--------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 110.8 35.4% $ 63.2 21.2%
==========================================================================================================================
(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.
TELUS 30
--------------------------------------------------------------------------------
notes to interim consolidated financial statements
--------------------------------------------------------------------------------
Three-month periods ended 2006 2005
March 31 (millions)
--------------------------------------------------------------------------------------------------------------------------------
Unrealized
fair Unrealized
Cumulative value of Cumulative fair value
foreign derivative foreign of
currency cash Minimum currency derivative Minimum
translation flow pension translation cash flow pension
adjustment hedges liability Total adjustment hedges liability Total
--------------------------------------------------------------------------------------------------------------------------------
Amount arising $ 0.7 $ (35.0) $ (2.2) $ (36.5) $ (3.1) $ (165.3) $ (0.9) $ (169.3)
Income tax expense (recovery) -- (11.9) (0.8) (12.7) -- (56.9) (0.2) (57.1)
-------------------------------------------------------------------------------------------------------------------------------
Net 0.7 (23.1) (1.4) (23.8) (3.1) (108.4) (0.7) (112.2)
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 $ (6.6) $ (223.7) $ (169.1) $ (399.4) $ (5.3) $ (229.5) $ (126.6) $ (361.4)
===============================================================================================================================
(i) Recently issued accounting standards not yet implemented
As would affect the Company, there are no U.S. accounting standards
currently issued and not yet implemented that would differ from Canadian
accounting standards currently issued and not yet implemented.
______________________________________________________________________________
TELUS 31
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 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 2006 guidance purposes include: economic growth
consistent with recent provincial and national estimates by the
Conference Board of Canada, including gross domestic product growth of
3.1% in Canada; increased wireline competition in both business and
consumer markets; a wireless industry market penetration gain similar to
the approximately five percentage point gain in 2005; up to $100 million
of restructuring and workforce reduction expenses; an effective tax rate
of approximately 34%; no prospective significant acquisitions or
divestitures; no change in foreign ownership rules; and maintenance or
improvement of investment-grade credit ratings.
Factors that could cause actual results to differ materially include but
are not limited to: competition; technology (including reliance on
systems and information technology); regulatory developments (including
wireless number portability and possible future changes to the regulatory
environment); human resources (including possible labour disruptions);
business integrations and internal reorganizations; process risks
(including the conversion of legacy systems and security); financing and
debt requirements (including share repurchases and debt redemptions); tax
matters; health, safety and environment developments; litigation and
legal matters; business continuity events (including manmade and natural
threats); economic growth and fluctuations (including pension
performance, funding and expenses); and other risk factors discussed
herein and listed from time to time in TELUS' reports, public disclosure
documents including the Annual Information Form, and other filings with
securities commissions in Canada (filed on SEDAR at sedar.com) and the
United States (filed on EDGAR at sec.gov).
For further information, see Section 10: Risks and risk management of
TELUS' annual 2005 Management's discussion and analysis, and updates
included in Section 10 of this first quarter interim Management's
discussion and analysis.
___________________________________________________________________________
Management's discussion and analysis
May 3, 2006
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month periods ended
March 31, 2006 and 2005, and should be read together with TELUS' interim
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' interim 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 18 to the interim
consolidated financial statements for a summary of the principal differences
between Canadian and U.S. GAAP as they relate to TELUS. The interim
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.
TELUS 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. 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. Overall performance A summary of consolidated results for the
first quarter 2006
-------------------------------------------------------------------------
2. Core business, Examples of TELUS' activities in support of
vision and strategy its six strategic imperatives
-------------------------------------------------------------------------
3. Key performance A report on the progress against TELUS' 2006
drivers priorities
-------------------------------------------------------------------------
4. Capability to deliver An update on TELUS' capability to deliver
results results
-------------------------------------------------------------------------
5. Results from A detailed discussion of operating results
operations for the first quarter of 2006
-------------------------------------------------------------------------
6. Financial condition A discussion of significant changes in the
balance sheet at March 31, 2006, as compared
to December 31, 2005
-------------------------------------------------------------------------
7. Liquidity and capital A discussion of cash flow, liquidity, credit
resources facilities, off-balance sheet arrangements
and other disclosures
-------------------------------------------------------------------------
8. Critical accounting A description of accounting estimates and
estimates and changes to accounting policies
accounting policy
developments
-------------------------------------------------------------------------
9. Revised annual A discussion of revisions to TELUS' annual
guidance for 2006 guidance for 2006
-------------------------------------------------------------------------
10. Risks and risk An update of risks and uncertainties facing
management TELUS and how it manages these risks
-------------------------------------------------------------------------
11. Reconciliation of A description, calculation and reconciliation
non-GAAP measures and of certain measures used by management
definition of key
operating indicators
-------------------------------------------------------------------------
1. Overall performance
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 Consolidated highlights
-------------------------------------------------------------------------
($ in millions, except shares, per share Quarters ended March 31
amounts and subscribers) 2006 2005 Change
-------------------------------------------------------------------------
Operating revenues 2,080.5 1,974.7 5.4 %
Operating income 459.6 454.0 1.2 %
Income before income taxes and
non-controlling interest 328.3 314.1 4.5 %
Income taxes 116.1 70.3 65.1 %
Net income and Common Share and
Non-Voting Share income 210.1 242.2 (13.3)%
Earnings per share, basic ($) 0.60 0.67 (10.4)%
Earnings per share, diluted ($) 0.60 0.66 (9.1)%
Cash dividends declared per share ($) 0.275 0.20 37.5 %
Cash provided by operating activities 673.1 728.4 (7.6)%
Cash used by investing activities 316.1 306.2 3.2 %
Capital expenditures 320.5 273.2 17.3 %
Cash used by financing activities 366.7 71.4 n.m.
Subscriber connections(1) (thousands)
as at March 31 10,306 9,792 5.2 %
EBITDA(2) 862.7 856.2 0.8 %
Free cash flow(3) 640.1 566.6 13.0 %
-------------------------------------------------------------------------
pts- percentage points n.m. - not meaningful
(1) The sum of network access lines, wireless subscribers and Internet
subscribers as 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.
-------------------------------------------------------------------------
Highlights, as discussed in Section 5: Results from operations, include
the following (comparing the first quarter of 2006 to the first quarter of
2005):
- Subscriber connections increased by 514,000 in the 12 month period
ended March 31, 2006, as wireless subscribers grew by 14.9% to
4.6 million and Internet subscribers grew by 4.8% to one million,
while network access lines decreased by 2.7% to 4.7 million.
- Operating revenues increased by $105.8 million as the 17% growth in
wireless revenues and 4% growth in wireline data revenues were partly
offset by lower wireline voice revenues.
- EBITDA increased by $6.5 million in the first quarter of 2006. Margins
increased slightly in the wireless segment through subscriber growth
and increased ARPU (average revenue per subscriber unit per month)
despite increased operations expenses. A decrease in margins in the
wireline segment were caused by increased competition for local
services and continued long distance revenue erosion as well as a 4.0%
increase in total wireline expenses. Wireline expenses increased in
part due to increased use of contractors for network support and
maintenance activities to help clear backlogs and free up TELUS staff
to improve customer service, as reflected in improved quality-of-
service metrics defined by the CRTC.
- Operating income increased by $5.6 million for the reasons described
above partly offset by a small increase in depreciation and
amortization expenses.
- Income before income taxes and non-controlling interest increased by
$14.2 million due primarily to lower financing costs as a result of
the early redemption of $1.578 billion of 7.50%, Series CA, Notes on
December 1, 2005, partly offset by lower interest income.
- Income taxes increased by $45.8 million due primarily to one-time tax
recoveries recorded in the first quarter of 2005 leading to an
unusually low effective tax rate in that period. The effective tax
rates for the first quarter of 2006 and 2005 were 35.4% and 22.4%,
respectively. The income tax expense in the first quarter of 2006 was
primarily future income taxes.
- Net income and earnings per share decreased primarily due to one-time
tax recoveries and related interest income net of taxes recorded in
first quarter of 2005 (approximately $54 million or 15 cents per
share). Earnings per share for the first quarter of 2006 increased by
approximately eight cents or 15%, when compared to 2005 earnings
normalized to exclude the one-time tax recovery.
Highlights, as discussed in Section 7: Liquidity and capital resources,
include the following (comparing the first quarter of 2006 to the first
quarter of 2005):
- Cash provided by operating activities decreased by $55.3 million due
mainly to the reduction of securitized accounts receivable by $100
million and reduced accounts payable and accrued liabilities, partly
offset by greater cash tax recoveries and related interest received as
well as reduced trade accounts receivable.
- Cash used by investing activities increased primarily due to greater
capital expenditures.
- Cash used by financing activities increased by $295.3 million due
mainly to increased purchases of Common Shares and Non-Voting Shares
under normal course issuer bids and payment of dividends.
- Free cash flow increased primarily due to greater cash tax recoveries
and related interest received, partly offset by increased capital
expenditures.
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,
as well as Section 10: Risks and risk management of TELUS' annual 2005
Management's discussion and analysis and significant updates in Section 10:
Risks and risk management of this report.
TELUS' core business, vision and strategy were detailed in its 2005
annual Management's discussion and analysis. Recent activities in support of
the Company's six strategic imperatives include the following:
Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy and focus TELUS' resources on core business
In April 2006, TELUS acquired privately-owned FSC Internet Corp.
operating as Assurent Secure Technologies ("Assurent"), a Toronto-based
provider of information technology security services and products. Assurent's
core business includes security software, vulnerability research, and related
engineering and consulting services provided to some 90 customers in Canada,
the U.S., Europe and Asia. This acquisition, with annual revenues of less than
$10 million, is expected to augment TELUS' existing suite of security
solutions and is also consistent with the imperative of "focusing relentlessly
on the growth markets of data, IP and wireless."
Focusing relentlessly on the growth markets of data, IP and wireless
In 2006 up to mid-April, TELUS has expanded the availability of its
wireless high speed service to Fort McMurray, Mont-Tremblant and Saint-Jovite,
Quebec City, and Whistler. Wireless high speed services have typical download
speeds of 400 to 700 kilobits per second, based on the CMDA 1xEVDO standard,
the newest third generation, or 3G, wireless data technology available. TELUS
also offers a variety of wireless High Speed PCS phones and data devices,
including the LG 8100, the Motorola RAZR V3c, the RIM BlackBerry 7130e, the
UTStarcom Pocket PC 6700, the Kyocera Passport KPC650 and the Sierra Wireless
AirCard 580. Each of these devices are backward compatible, providing
customers with the ability to use them on TELUS' national 1X data network
(which covers more than 90 per cent of the Canadian population) when they're
outside a wireless high-speed coverage area. By uniting wireless broadband
services with new portable computing and entertainment devices, TELUS is
providing business clients and consumers in eleven communities and major
centres across Canada with powerful mobile data solutions.
TELUS introduced its SPARK (TM) line of mobile entertainment, information
and messaging services for consumers, which includes TELUS Mobile Music (TM),
TELUS Mobile TV (TM), multimedia messaging, downloadable images, ring tones,
videos and games, and new Web browser features, including search tools and a
broad range of new online content. TELUS' new mobile music service offers
customers across Canada access to a large mobile music catalogue with
selections from EMI Music, SonyBMG, Universal Music Group and Warner Music
Group. This service operates on both the wireless high speed network and the
1x digital data network - the latter at speeds of up to 144 kilobits per
second.
TELUS continues its targeted launch of TELUS TV (R) service. In January
2006, TELUS announced the construction of a "head end" in B.C. to gather TV
signals from dozens of satellites for transmission to customers in B.C. and
Alberta. When this new facility begins to operate, it will join the existing
centre in Edmonton, both servicing customers in the two provinces and
providing back up capability to each other in the event of an outage. Also in
January, the choice of movies available for TELUS TV video-on-demand service
was expanded with the announcement of a long-term distribution agreement with
Twentieth Century Fox. TELUS has now announced plans to expand from its
targeted launches in Edmonton and Calgary with a trial and targeted launch in
the B.C. lower mainland in the fall of 2006.
3. Key performance drivers
The Company set new priorities for 2006 to advance its 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 through:
- TELUS' future friendly suite of data applications for customers at
home and on the move
- Best-in-class customer loyalty through cost-effective customer
experience
- Expanding TELUS' channel partner relationships to strengthen its
distribution.
-------------------------------------------------------------------------
Advance TELUS' position in the business market through:
- Innovative solutions that enhance the competitiveness of TELUS'
customers and deepen their loyalty to TELUS
In April 2006, the Company introduced the TELUS Business One(R)
Bundle, which offers small and medium business customers a choice
of communications tools for one price, a single point of contact for
technical services and one simplified bill. TELUS Business One
includes high-speed Internet, long distance service, up to $30 per
month worth of powerful business tools at no extra cost, exclusive
pricing on upgrades to these business tools, and optional phone and
calling services. Customers also have a dedicated 24 x 7 support for
their business services.
- Increasing the Company's share in the business market by leveraging
TELUS' mobile solutions such as high-speed data
- Improving delivery of managed solutions to small business customers.
-------------------------------------------------------------------------
Advance TELUS' position in the wholesale market through:
- Strengthening the Company's North American reach through innovative IP
solutions
- Establishing creative and preferred partnerships to grow TELUS'
national customer base
- Optimizing the use of partner networks to complement TELUS' network
investments.
-------------------------------------------------------------------------
Drive improvements in productivity and service excellence by:
- Realizing efficiencies from the integration of wireline and wireless
operations
- Driving improvements in enterprise-wide productivity and customer
service excellence to increase competitiveness
- Capturing value from TELUS' investments in technology and innovation
to streamline operations.
-------------------------------------------------------------------------
Strengthen the spirit of the TELUS team and brand, and develop the best
talent in the global communications industry by:
- Continuing to leverage best practices across the Company
- Cultivating a business ownership culture that embraces a philosophy of
"our business, our customers, our team, my responsibility"
- Capitalizing on TELUS' reputation as a progressive, high-performance
Company to attract and retain the best team in Canada
- Providing team members innovative opportunities for growth,
development and employment options.
-------------------------------------------------------------------------
4. Capability to deliver results
4.1 Operational capabilities across wireline and wireless
Integration of wireline and wireless operations
The integration of the wireline and wireless operations continues. One of
the expected benefits of integration is that TELUS will be better able to
serve customers through attractive solutions that combine competitive wireline
services with wireless services. To facilitate this initiative, TELUS combined
its wireline, wireless and broadcasting operations into a single legal entity,
TELUS Communications Company partnership on March 1, 2006. See Section 10.3
Business integration and internal reorganizations.
Development of a new billing system in the wireline segment
The development of a new wireline billing system continued in the first
quarter of 2006, which includes re-engineering processes for order entry, pre-
qualification, service fulfillment and assurance, customer care,
collections/credit, customer contact, and information management. The expected
benefits of this project include streamlined and standardized processes and
the elimination over time of multiple legacy information systems. The Company
plans to implement this project in phases, beginning with a launch for
consumer mass market accounts currently planned for 2006. See Section 10.4
Process risks.
Continued recognition for TELUS' wireless operational excellence
For eight consecutive quarters, TELUS' wireless segment has attained
first or second place in the survey of North American wireless operators
published by N. Moore Capital. TELUS was most recently ranked second across an
array of wireless operating and financial metrics for the fourth quarter of
2005.
4.2 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 TELUS' annual 2005 Management's discussion and analysis Section 9.3
Financing plan for 2006 and Section 10.7 Financing and debt requirements.
At March 31, 2006, TELUS had access to undrawn credit facilities of
approximately $1.5 billion. These, combined with expected cash flow from
operations and availability under the accounts receivable securitization
program, the Company believes it has sufficient capability to fund its
requirements in 2006. 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")
Repurchased approximately 1.8 million Common Shares and 3.3 million
Non-Voting Shares for $231.6 million in the first quarter of 2006.
Between December 20, 2004 and March 31, 2006, the Company repurchased
approximately 28.1 million TELUS shares for $1.2 billion under two
NCIB programs. See Section 7.3 Cash used by financing activities.
--------------------------------------------------------------------------
- Pay dividends
The declared dividend for the first quarter of 2006, payable on
April 1, was 27.5 cents per share, as compared to 20 cents in the
first quarter of 2005. The target dividend payout ratio guideline
continues to be in the range of 45 to 55% of sustainable net earnings.
-------------------------------------------------------------------------
- Retain cash-on-hand for corporate purposes
During the first quarter of 2006, securitized accounts receivable were
reduced by a net $100 million, while bank facilities were reduced by a
net $71 million. At March 31, 2006, the balance of cash and short-term
investments was not significant.
-------------------------------------------------------------------------
Other financing objectives included:
-------------------------------------------------------------------------
- Maintain a minimum $1 billion in unutilized liquidity
TELUS had available liquidity from unutilized credit facilities of
approximately $1.5 billion at March 31, 2006.
-------------------------------------------------------------------------
- Maintain position of fully hedging foreign exchange exposure for
indebtedness
Maintained as planned at March 31, 2006.
-------------------------------------------------------------------------
- Give consideration to refinancing all or a portion of U.S Dollar
denominated Notes due June 1, 2007 in advance of its scheduled
maturity
In contemplation of the planned refinancing of the debt maturing
June 1, 2007, the Company had entered into forward starting interest
rate swap agreements, as at March 31, 2006, that have the effect of
fixing the underlying interest rate on up to $300 million of
replacement debt.
-------------------------------------------------------------------------
- Preserve access to the capital markets at a reasonable cost by
maintaining investment grade credit ratings and targeting improved
credit ratings in the range of BBB+ to A-, or the equivalent, in the
future
Investment grade credit ratings from the four rating agencies that
cover TELUS were maintained in the target range.
-------------------------------------------------------------------------
5. Results from operations
5.1 General
The Company has two reportable segments: wireline and wireless.
Segmentation is based on similarities in technology, the technical expertise
required to deliver the products and services, the distribution channels used
and regulatory treatment. Intersegment sales are recorded at the exchange
value. Segmented information is regularly reported to the Company's Chief
Executive Officer (the chief operating decision maker).
5.2 Quarterly results summary
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2006 Q1 2005 Q4 2005 Q3 2005 Q2 2005 Q1
-------------------------------------------------------------------------
Segmented revenue
(external)
Wireline segment 1,198.6 1,209.9 1,198.6 1,216.5 1,222.2
Wireless segment 881.9 876.8 864.2 802.0 752.5
-------------------------------------------------------------------------
Operating revenues
(consolidated) 2,080.5 2,086.7 2,062.8 2,018.5 1,974.7
Operations expense 1,201.1 1,316.8 1,221.5 1,146.1 1,109.1
Restructuring and
workforce reduction costs 16.7 35.5 1.6 7.4 9.4
Depreciation 339.2 346.2 335.6 330.9 329.9
Amortization of intangible
assets 63.9 67.0 73.6 68.2 72.3
-------------------------------------------------------------------------
Operating income 459.6 321.2 430.5 465.9 454.0
Other expense (income) 4.3 9.3 7.1 0.5 1.5
Financing costs 127.0 171.7 144.8 168.2 138.4
Income taxes 116.1 58.8 86.9 106.0 70.3
Non-controlling interest 2.1 2.9 1.6 1.7 1.6
-------------------------------------------------------------------------
Net income 210.1 78.5 190.1 189.5 242.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per weighted average
Common Share and Non-Voting
Share outstanding
- basic 0.60 0.22 0.53 0.53 0.67
- diluted 0.60 0.22 0.53 0.52 0.66
Dividends declared per
Common Share and Non-Voting
Share outstanding 0.275 0.275 0.20 0.20 0.20
-------------------------------------------------------------------------
-------------------------------------------------------
($ in millions, except
per share amounts) 2004 Q4 2004 Q3 2004 Q2
-------------------------------------------------------
Segmented revenue
(external)
Wireline segment 1,209.3 1,199.9 1,189.0
Wireless segment 755.6 747.0 676.6
-------------------------------------------------------
Operating revenues
(consolidated) 1,964.9 1,946.9 1,865.6
Operations expense 1,178.5 1,112.8 1,080.1
Restructuring and
workforce reduction costs 19.8 16.2 0.7
Depreciation 338.3 327.1 320.7
Amortization of intangible
assets 79.2 80.5 86.9
-------------------------------------------------------
Operating income 349.1 410.3 377.2
Other expense (income) 8.7 (3.2) 2.0
Financing costs 152.8 158.6 156.9
Income taxes 50.4 97.2 44.9
Non-controlling interest 1.6 1.1 1.1
-------------------------------------------------------
Net income 135.6 156.6 172.3
-------------------------------------------------------
-------------------------------------------------------
Net income per weighted average
Common Share and Non-Voting
Share outstanding
- basic 0.38 0.44 0.48
- diluted 0.37 0.43 0.48
Dividends declared per
Common Share and Non-Voting
Share outstanding 0.20 0.15 0.15
-------------------------------------------------------
The trend in consolidated Operating revenues reflects strong growth in
wireless revenue, which arose from the combined effects of increased average
revenue per subscriber unit per month ("ARPU") and a growing subscriber base.
The trend also reflects growth in wireline segment data revenue, while
wireline long distance and other revenues have decreased. In the first quarter
of 2006, wireline local revenue decreased when compared to the same period in
2005, due to increasing competition for local services. Wireline revenues
include the generally negative effect of regulatory price cap decisions.
The trend in Operating income was affected by temporary net expenses
leading up to and resulting from a 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 quarter of 2005. In addition, Restructuring and work force
reduction charges varied significantly by quarter, depending on the progress
of initiatives under way at the time. Depreciation is increasing modestly due
to continued investment in shorter-life data and wireless equipment, while
Amortization of intangible assets is decreasing as several software assets
have been fully amortized.
Within Financing costs, interest expenses trended lower, except for two
one-time charges: a second quarter 2005 accrual of $17.5 million for
settlement of a lawsuit related to a 1997 BC TEL bond redemption matter as
well as a fourth quarter 2005 charge of $33.5 million to early redeem
$1.578 billion of Notes. The early redemption of Notes on December 1, 2005,
contributed significantly to lower Financing costs in the first quarter of
2006. Financing costs were also net of varying interest income in each of the
periods shown.
The trend in Net income and earnings per share reflect the items noted
above. In addition, Net income and earnings per share for seven of the
quarters included net favourable impacts for the settlement of prior years'
tax matters and consequential adjustments. The most significant income tax
recoveries and related interest income net of taxes were recorded in the
second quarter of 2004 (approximately $45 million or 13 cents per share) and
the first quarter of 2005 (approximately $54 million or 15 cents per share).
Historically, there is significant fourth quarter seasonality for
wireless subscriber gross additions, related acquisition costs and equipment
sales, and to a lesser extent, for wireline high-speed Internet subscriber
gross additions.
On May 3, 2006, the Board of Directors of TELUS declared a quarterly
dividend of 27.5 cents per share on outstanding Common and Non-Voting Shares
payable on July 1, 2006 to shareholders of record on the close of business on
June 9, 2006.
5.3 Consolidated results from operations
-------------------------------------------------------------------------
($ in millions except EBITDA margin) Quarters ended March 31
2006 2005 Change
-------------------------------------------------------------------------
Operating revenues 2,080.5 1,974.7 5.4 %
Operations expense 1,201.1 1,109.1 8.3 %
Restructuring and workforce reduction
costs 16.7 9.4 77.7 %
-------------------------------------------------------------------------
EBITDA(1) 862.7 856.2 0.8 %
Depreciation 339.2 329.9 2.8 %
Amortization of intangible assets 63.9 72.3 (11.6)%
-------------------------------------------------------------------------
Operating income 459.6 454.0 1.2 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA margin(%)(2) 41.5 43.4 (1.9) pts
Total employees, end of period 29,290 28,456 2.9 %
-------------------------------------------------------------------------
(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 $105.8 million in the first
quarter of 2006, when compared with the same period in 2005. Revenue and
subscriber growth continued in wireless operations as well as in wireline data
services including enhanced data, managed workplace and high-speed Internet
services. However, wireline revenues declined overall as long distance and
equipment sales revenues continued to erode, and voice local revenue showed a
year-over-year decrease due to the effects of increased competition and a one-
time regulatory recovery in the same period in 2005.
Operations expense
Consolidated operations expense increased by $92.0 million in the first
quarter of 2006, when compared to the same period in 2005. The increase was
primarily in the wireless segment due to higher gross subscriber additions,
higher costs of acquisition ("COA") and increased subscriber retention
activity as well as increased staffing to support the 15% growth in
subscribers over the past twelve months. In addition, increased wireline
segment expenses included network maintenance and support costs to reduce
backlogs and improve quality of service indicators. For TELUS, 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.
Restructuring and workforce reduction costs
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 March
31, 2006, no future expenses remain to be accrued or recorded under the
smaller initiatives that were substantially completed in 2005, 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 that is a component of the Company's competitive efficiency program.
For the three-month period ended March 31, 2006, $3.8 million of restructuring
and workforce reduction costs were recorded in respect of this initiative and
were included with general programs initiated in 2006.
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.
Also arising from its competitive efficiency program, the Company
undertook an initiative for a departmental reorganization and reconfiguration,
resulting in integration and consolidation. Approximately 600 bargaining unit
employees may be affected by this initiative and 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).
Expenses under this initiative are expected to be recorded in the second
quarter of 2006, as affected employees were not required to select an option
until after March 31, 2006 and therefore the associated expenses were not
eligible for recording during the three-month period ended March 31, 2006.
Future costs will be incurred as the initiative continues.
Restructuring and workforce reduction costs recorded in the first quarter
of 2006 totaled $16.7 million, an increase from $9.4 million recorded in the
same period last year. The Company's estimate of restructuring and workforce
reduction costs in 2006, arising from its competitive efficiency program,
which includes the office closures and contracting out and integration of
wireline and wireless operations, is not currently expected to exceed
$100 million.
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 March 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, are expected to be incurred
and recorded subsequent to March 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 March 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 $6.5 million in the first quarter of 2006, when
compared with the same period in 2005. The increase in EBITDA was due
primarily to wireless segment subscriber growth and increased ARPU, partly
offset by wireless operations expense growth, leading to a slight increase in
the wireless EBITDA margin. Wireline segment EBITDA decreased due primarily to
increased competition for local services, continued long distance revenue
erosion as well as a 4.0% increase in operating expenses due in part due to
increased use of contractors for network support and maintenance. The EBITDA
margin decrease of 1.9 percentage points originated in the wireline segment.
Depreciation and amortization
Depreciation increased by $9.3 million in the first quarter of 2006, when
compared with the same period in 2005. The increase was due primarily to a
reduction in service lives for servers and furniture as well as increased
retirements of network assets, which were partly offset by lower depreciation
for high speed Internet modems that are fully depreciated. Amortization of
intangible assets decreased by $8.4 million in the first quarter of 2006, when
compared with the same period in 2005, as a result of several software assets
becoming fully amortized.
Operating income
Operating income increased by $5.6 million in the first quarter of 2006,
when compared with the same period in 2005, due primarily to the growth in
EBITDA as described above.
Other income statement items
-------------------------------------------------------------------------
Other expense, net Quarters ended March 31
($ millions) 2006 2005 Change
-------------------------------------------------------------------------
4.3 1.5 186.7 %
-------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense,
charitable donations, gains and losses on disposal of property, and income
(loss) or impairments in equity or portfolio investments. The accounts
receivable securitization expense was $3.2 million in first quarter of 2006,
as compared to $1.0 million in the same period in 2005. The increase resulted
primarily from a higher balance of proceeds from securitized accounts
receivable in 2006 (see Section 7.6 Accounts receivable sale).
-------------------------------------------------------------------------
Financing costs Quarters ended March 31
($ millions) 2006 2005 Change
-------------------------------------------------------------------------
Interest on long-term debt, short-term
obligations and other 127.0 159.0 (20.1)%
Foreign exchange losses (gains) 1.1 2.5 (56.0)%
Interest income (1.1) (23.1) 95.2 %
-------------------------------------------------------------------------
127.0 138.4 (8.2)%
-------------------------------------------------------------------------
Interest on long-term debt, short-term obligations and other decreased by
$32.0 million in the first quarter of 2006, when compared with same period in
2005, due primarily to the lower debt levels as a result of early redemption
of $1.578 billion of 7.50%, Series CA, Notes on December 1, 2005, as well as
the conversion/redemption of convertible debentures in the second quarter of
2005. TELUS maintains a hedging program using cross currency swaps, and as a
result, long-term financing costs were generally unaffected by fluctuations in
the value of the Canadian dollar against the U.S. dollar. Debt (the sum of
Long-term Debt, Current maturities and the deferred hedging liability) was
$5,732 million at March 31, 2006, a 22% reduction when compared with
$7,375 million on March 31, 2005.
Interest income decreased by $22.0 million in the first quarter of 2006,
when compared with the same period in 2005. The decrease was due primarily to
one-time interest on tax refunds of $15.6 million recorded in the first
quarter of 2005. Interest income earned primarily from cash and temporary
investments decreased to $1.1 million in the first quarter of 2006 from
$7.5 million in the same period in 2005, as available cash balances were used
for debt redemption.
-------------------------------------------------------------------------
Income taxes Quarters ended March 31
($ millions, except tax rates) 2006 2005 Change
-------------------------------------------------------------------------
Blended federal and provincial
statutory income tax based on
net income before tax 111.5 108.7 2.6 %
Changes in estimates of available
deductible differences in prior years - (36.0) 100.0 %
Tax rate differential on, and
consequential adjustments from, the
reassessment of prior year tax issues (0.3) (11.3) 97.3 %
Large corporations tax and other 4.9 8.9 (44.9)%
-------------------------------------------------------------------------
116.1 70.3 65.1 %
-------------------------------------------------------------------------
Blended federal and provincial statutory
tax rates (%) 34.0 34.6 (0.6) pts
Effective tax rates (%) 35.4 22.4 13.0 pts
-------------------------------------------------------------------------
The increase in the blended federal and provincial statutory income tax
expense was due mainly to the 4.5% increase in income before taxes in the
first quarter of 2006, when compared with the same period in 2005. The blended
federal and provincial tax rate decreased due to a reduction to general
corporate income tax rates on income taxed in B.C, effective July 1, 2005,
partly offset by an increase to general corporate income tax rates in Quebec
beginning January 1, 2006. Reductions in tax in 2005 included changes in
estimates of available deductible differences in prior years and a tax rate
differential and consequential adjustments from the favourable reassessment of
prior years' tax issues. During the first quarter of 2006, the Government of
Alberta announced legislation to reduce the general corporate income tax rate
from 11.5% to 10% for income taxed in Alberta effective April 1, 2006. As the
legislation was not substantively enacted until April 2006, no adjustments
were recorded in the first quarter of 2006; however, management expects to
record a tax recovery of approximately $13 million for the revaluation of
future income tax liabilities in the second quarter of 2006. Management also
expects the effective income tax rate to be approximately 34% for the full
year of 2006. See Forward-looking statements at the beginning of Management's
discussion and analysis.
Based on the assumption of the continuation of the rate of TELUS
earnings, the legal entity structure, and no substantive changes to tax
regulations, the Company expects to be able to fully utilize its non-capital
losses before the end of 2007. The Company's assessment is that the risk of
expiry of such non-capital losses is remote. Current income taxes recorded in
2007 for income not sheltered by remaining tax losses are not expected to
become payable until 2008.
-------------------------------------------------------------------------
Non-controlling interest Quarters ended March 31
($ millions) 2006 2005 Change
-------------------------------------------------------------------------
2.1 1.6 31.3 %
-------------------------------------------------------------------------
Non-controlling interest represents minority shareholders' interests in
several small subsidiaries.
5.4 Wireline segment results
-------------------------------------------------------------------------
Operating revenues - wireline segment Quarters ended March 31
($ millions) 2006 2005 Change
-------------------------------------------------------------------------
Voice local 535.6 552.8 (3.1)%
Voice long distance 207.8 226.4 (8.2)%
Data 393.6 377.6 4.2 %
Other 61.6 65.4 (5.8)%
-------------------------------------------------------------------------
External operating revenue 1,198.6 1,222.4 (1.9)%
Intersegment revenue 23.5 22.6 4.0 %
-------------------------------------------------------------------------
Total operating revenue 1,222.1 1,244.8 (1.8)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Key operating indicators -
wireline segment
At March 31
(000s) 2006 2005 Change
--------------------------------
Residential network access lines 2,900 3,024 (4.1)%
Business network access lines 1,763 1,769 (0.3)%
--------- ---------- ---------
Total network access lines(1) 4,663 4,793 (2.7)%
High-speed Internet subscribers 801.7 711.9 12.6 %
Dial-up Internet subscribers 227.8 270.4 (15.8)%
--------- ---------- ---------
Total Internet subscribers(2) 1,029.5 982.3 4.8 %
Quarters ended March 31
(000s) 2006 2005 Change
--------------------------------
Change in residential network
access lines (28) (14) (100.0)%
Change in business network access lines - (1) n.m.
--------- ---------- ---------
Change in total network access lines(1) (28) (15) (86.7)%
High-speed Internet net additions 38.6 22.2 73.9 %
Dial-up Internet net reductions (8.3) (11.2) 25.9 %
--------- ---------- ---------
Total Internet subscriber net additions 30.3 11.0 175.5 %
-------------------------------------------------------------------------
(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 9,000
between residential and business; no change was recorded in total
access lines.
(2) Internet subscribers are measured at the end of the reporting period
based on Internet access counts from billing and other systems.
-------------------------------------------------------------------------
Wireline revenues decreased by $22.7 million in the first quarter of
2006, when compared with the same period in 2005, as the growth in data
revenues was more than offset by increased competition for local services, a
one-time regulatory recovery in local revenues in the prior year period,
continued erosion of long distance revenues and lower voice equipment sales.
- Voice local revenue decreased by $17.2 million in the first quarter of
2006, when compared with the same period in 2005 due primarily to
lower regulatory recoveries and residential access line losses due to
increased competition. Regulatory recoveries drawn from the price cap
deferral account to offset mandated additional discounts for
competitive digital network services (in basic data services),
pursuant to CRTC Decision 2005-6, were approximately $11 million in
the first quarter of 2006, as compared to approximately $18 million in
the first quarter of 2005 - the amount in 2005 included a one-time
adjustment for prior years. Another regulatory recovery affecting the
first quarter of 2005 was a one-time positive $6.4 million recorded
pursuant to CRTC Decision 2005-4 (pertaining to subsidy requirements
for high cost serving areas in TELUS Quebec ILEC territory for 2003 to
2005).
Residential line losses include the effect of increased competition
from resellers, VoIP competitors including cable-TV companies,
technological substitution to wireless services, and lower numbers of
second lines resulting from migration of dial-up Internet subscribers
to high-speed Internet. In 2006, cable telephony is offered in more
communities in TELUS' incumbent regions including Edmonton, Fort
McMurray, Rimouski, Victoria, and Vancouver and adjacent communities,
compared with only Calgary in the first quarter of 2005. Total
business lines did not change significantly during the first quarter
of 2006 and the first quarter of 2005 as growth in non-incumbent
regions offset competitive losses and migration to more efficient ISDN
(integrated services digital network) services in incumbent local
exchange carrier ("ILEC") regions.
- Voice long distance revenues decreased by $18.6 million in the first
quarter of 2006, when compared with the same period in 2005, due
primarily to lower prices and lower ILEC volumes, which is consistent
with industry wide trends of strong price competition and
technological substitution (Internet and wireless). The 8.2% rate of
decrease in long distance revenue exceeded the 1.4% rate of erosion
from the same period in 2005, and is more consistent with the 7.7%
rate of erosion observed in the fourth quarter of 2005.
- Wireline segment data revenues increased by $16.0 million in the first
quarter of 2006, when compared with the same period in 2005. This
growth was primarily due to: (i) increased Internet, enhanced data and
hosting service revenues as a result of traction from new business
contracts and continued growth in high-speed Internet subscribers
partly offset by a lower average price; (ii) increased managed data
revenues from the provision of business process outsourcing services
to customers and one and one-half months additional call centre
revenues from Ambergris (acquired in mid-February 2005); and (iii)
lower discounts for competitive digital network services. Partially
offsetting this growth were lower data equipment sales in the first
quarter of 2006 as well as continued migration of basic data services
to more efficient enhanced data services
The improvement in high-speed Internet subscriber net additions in the
first quarter of 2006 was due to successful marketing, including
promotions that were not available in the prior year, resulting in
increased gross additions, enhanced by lower deactivations of existing
customers.
- Other revenue decreased by $3.8 million in the first quarter of 2006,
when compared with the same period in 2005, due mainly to lower voice
equipment sales.
- 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
$164.1 million in the first quarter of 2006, an increase of $4.6 million or
2.9% when compared with same period in 2005. Non-ILEC voice long distance
revenues increased by approximately 13% over the same period last year mainly
as a result of increased volumes, partly offset by lower average rates. Growth
in revenues was partly offset by re-pricing of renewal contracts and
competitive pricing affecting new contracts, as well as lower equipment sales.
-------------------------------------------------------------------------
Operating expenses - wireline segment Quarters ended March 31
($ millions, except employees) 2006 2005 Change
-------------------------------------------------------------------------
Salaries, benefits and
other employee-related costs 413.2 414.1 (0.2)%
Other operations expenses 327.2 302.5 8.2 %
-------------------------------------------------------------------------
Operations expense 740.4 716.6 3.3 %
Restructuring and workforce reduction costs 14.9 9.4 58.5 %
-------------------------------------------------------------------------
Total operating expenses 755.3 726.0 4.0 %
-------------------------------------------------------------------------
Total employees, end of period 22,384 22,172 1.0 %
-------------------------------------------------------------------------
Total operating expenses increased by $29.3 million in first quarter of
2006, when compared with the same period in 2005. Growth in operations
expenses was a result of increased use of contractors for network support and
maintenance activities and computer system development, facilitating clearance
of backlogs and freeing up TELUS staff to improve customer service, as
reflected in improved quality-of-service metrics defined by the CRTC. The 212
increase in total employees included approximately 520 at TELUS' international
call centre operations, and approximately 90 at TELUS Sourcing Solutions to
support the provision of additional human resource outsourcing services to
customers, while staffing elsewhere decreased by 398.
- Salaries, benefits and employee-related expenses were relatively
unchanged in the first quarter of 2006, when compared with the same
period in 2005. Employee-related expenses increased by approximately
$4 million due to increased overtime and travel as well as training
required for new hires, employee back-to-work sessions and TELUS TV
initiatives. This increase was generally offset by a reduction in
other salaries and benefits.
- Other operations expenses increased by $24.7 million in the first
quarter of 2006, when compared with the same period in 2005. The
increase in other expenses was mainly the result of: (i) increased
contractor and consulting costs to support network maintenance and
construction as well as computer system development (ii), increased
facilities, transit and termination charges for higher outbound
traffic volumes including increased international traffic; and (iii)
increased consumer promotions expense for high-speed Internet. These
increases were partly offset by a lower cost of goods sold associated
with lower voice and data equipment sales. Bad debt expenses and
capitalization of labour did not change significantly from the same
period one year ago.
- Restructuring and work force reduction costs applicable to the
wireline segment increased by $5.5 million.
Included in the total wireline segment operations expenses are non-ILEC
operations expenses of $158.8 million in the first quarter of 2006, an
increase of $7.2 million or 4.7%, when compared with the same period in 2005.
Expense increases included higher facilities, transit and termination costs
from increased traffic volumes, increased contract and consulting expenses, as
well as higher salaries, benefits and employee-related costs, party offset by
a lower cost of sales related to lower equipment sales revenue.
-------------------------------------------------------------------------
EBITDA and EBITDA margin -
wireline segment Quarters ended March 31
2006 2005 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 466.8 518.8 (10.0)%
EBITDA margin (%) 38.2 41.7 (3.5) pts
-------------------------------------------------------------------------
EBITDA decreased by $52.0 million in the first quarter of 2006, when
compared with the same period in 2005. The primary causes were lower revenues
from increased competition for local services and continued long distance
revenue erosion, while total wireline operating expenses increased by 4.0%.
Non-ILEC EBITDA was $5.3 million in the first quarter of 2006, a decrease of
$2.6 million when compared with the same period in 2005. The decrease in non-
ILEC EBITDA resulted from competitive pressures on pricing combined with
expense increases for higher traffic volumes as well as increased consulting
costs.
Wireline segment capital expenditures are discussed in Section 7.2 Cash
used by investing activities.
5.5 Wireless segment results
-------------------------------------------------------------------------
Operating revenues - wireless segment Quarters ended March 31
($ millions) 2006 2005 Change
-------------------------------------------------------------------------
Network revenue 824.7 695.5 18.6 %
Equipment revenue 57.2 57.0 0.4 %
-------------------------------------------------------------------------
External operating revenue 881.9 752.5 17.2 %
Intersegment revenue 5.9 5.8 1.7 %
-------------------------------------------------------------------------
Total operating revenue 887.8 758.3 17.1 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Key operating indicators - wireless segment
-------------------------------------------------------------------------
(000s) At March 31
2006 2005 Change
--------------------------------
Subscribers - postpaid 3,737.2 3,315.1 12.7 %
Subscribers - prepaid 876.0 701.5 24.9 %
--------- ---------- ---------
Subscribers - total(1) 4,613.2 4,016.6 14.9 %
Digital POPs(2) covered including
roaming/resale (millions)(3) 30.6 30.2 1.3 %
--------------------------------
Quarters ended March 31
(000s) 2006 2005 Change
--------------------------------
Subscriber gross additions - postpaid 179.7 184.9 (2.8)%
Subscriber gross additions - prepaid 95.1 68.3 39.2 %
--------- ---------- ---------
Subscriber gross additions - total 274.8 253.2 8.5 %
Subscriber net additions - postpaid 70.4 74.8 (5.9)%
Subscriber net additions - prepaid 22.1 5.4 309.3 %
--------- ---------- ---------
Subscriber net additions - total 92.5 80.2 15.3 %
Churn, per month (%)(4)(5) 1.33 1.45 (0.12) pts
COA(6) per gross subscriber addition ($)(4) 429 355 20.8 %
ARPU ($)(4) 60 58 3.4 %
Average minutes of use
per subscriber per month (MOU) 386 371 4.0 %
EBITDA to network revenue (%) 48.0 48.5 (0.5) pts
Retention spend to network revenue(4) (%) 6.2 5.5 0.7 pts
EBITDA ($ millions) 395.9 337.4 17.3 %
EBITDA excluding COA ($ millions)(4) 513.8 427.2 20.3 %
-------------------------------------------------------------------------
pts - percentage points
(1) Subscribers are measured at the end of the reporting period based on
information from billing systems.
(2) POPs is an acronym 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 March 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 Mobility and
Aliant Telecom Wireless.
(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) Due to a change in business policy requiring postpaid customers to
provide 30 days notice prior to deactivation, a one-time deferral of
approximately 4,800 deactivations. Normalized to exclude this one-
time positive impact, the churn rate was 1.37% in the first quarter
of 2006.
(6) Cost of acquisition.
-------------------------------------------------------------------------
- Wireless segment Network revenue increased by $129.2 million over the
first quarter of 2005 to $824.7 million for the first quarter of 2006,
a record for TELUS. This growth was a result of the 14.9% expansion of
the subscriber base combined with a $2 increase in average revenue per
subscriber unit per month ("ARPU"). The ARPU growth was attributed to
increased data usage as well as higher revenues related to average
minutes of use per subscriber per month ("MOU").
Data revenues increased to 6.2% of Network revenue, or $51.3 million,
in the first quarter of 2006 as compared to 3.5% of Network revenues,
or $24.1 million, in the first quarter of 2005. Data ARPU for the
first quarter of 2006 increased to $3.71 as compared to $2.00 for the
same period in 2005 - an increase of 85.5%. This growth was
principally related to PDA (personal digital assistant) devices, text
messaging, and mobile computing.
At March 31, 2006, postpaid subscribers represented 81.0% of the total
cumulative subscriber base, remaining relatively stable from one year
earlier. Despite the commercial launch by new competitors in the
prepaid market over the last year, TELUS' wireless segment continued
to achieve significant growth in prepaid net subscriber additions
primarily as a result of the successful Talk Away (TM) bundle
offering, which was withdrawn part-way through the first quarter of
2006. The postpaid subscriber gross additions decreased slightly in
the first quarter of 2006, as compared to the same period in 2005.
Consequently, total subscriber net additions increased by 15.3% for
the first quarter of 2006 as compared with the same period last year.
Blended postpaid and prepaid monthly churn rates improved
significantly in the first quarter of 2006 when compared with the same
period in 2005. Effective February 1, 2006, wireless subscribers who
voluntarily deactivate service are required to provide 30 days notice.
Previously, clients were deactivated immediately upon request. As a
result, a one-time deferral of approximately 4,800 deactivations
contributed to the improved churn rate during the first quarter of
2006. Normalized for this impact, the churn rate would have been
1.37%. Despite this, the lower churn rate is a significant
accomplishment and continues to be a primary focus. Deactivations were
182,300 for the first quarter of 2006 as compared with 173,000 for the
same period last year. The churn and deactivation results reflect a
continued focus on customer care including successful loyalty and
retention efforts, enhanced product offerings, and superior network
quality.
- Equipment sales, rental and service revenue for the first quarter of
2006 increased mainly due to continued subscriber growth. Gross
subscriber additions grew to 274,800 in the first quarter of 2006 as
compared with 253,200 in the same quarter last year. Handset revenues
associated with gross subscriber activations are included in COA per
gross subscriber addition.
- 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 Quarters ended March 31
($ millions, except employees) 2006 2005 Change
-------------------------------------------------------------------------
Equipment sales expenses 126.2 104.6 20.7 %
Network operating expenses 105.9 98.4 7.6 %
Marketing expenses 93.8 74.3 26.2 %
General and administration expenses 164.2 143.6 14.3 %
-------------------------------------------------------------------------
Operations expense 490.1 420.9 16.4 %
Restructuring and workforce reduction costs 1.8 - n. m.
-------------------------------------------------------------------------
Total operating expenses 491.9 420.9 16.9 %
-------------------------------------------------------------------------
Total employees, end of period 6,906 6,284 9.9 %
-------------------------------------------------------------------------
Wireless segment total operating expenses increased by $71.0 million in
the first quarter of 2006, when compared with the same period in 2005, to
promote and support the 14.9% growth in the subscriber base and 18.6% increase
in Network revenue.
- Expenses related to equipment sales increased by $21.6 million in the
first quarter of 2006, when compared with the same period in 2005,
principally due 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 cost
related to Retention are included in the overall retention spend
amount.
- Network operating expenses increased by $7.5 million for the first
quarter of 2006, when compared with the same period in 2005,
principally due to higher roaming volumes within Canada. In addition,
transmission and site-related expenses increased to support the
greater number of cell sites, a larger subscriber base, and improved
network quality and coverage.
- Marketing expenses in the first quarter of 2006 increased by $19.5
million primarily due to increased advertising and promotions costs,
higher dealer compensation costs, and increased re-contracting
activity. COA per gross subscriber addition increased by $74 to $429
for the first quarter of 2006, when compared with the same period in
2005. The increase was related to advertising and promotion spending
(including the launch in the quarter of two advertising campaigns,
SPARK and Broadband on the Fly (TM)) as well as higher subsidies on
certain popular handsets driven by competitive activity. The lower
churn and increased ARPU contributed to improved life-time revenue per
subscriber even though COA per gross subscriber addition increased.
- General and administration expenses increased by $20.6 million in the
first quarter of 2006, when compared to the same quarter in 2005 due
to the increase in employees to support the significant growth in the
subscriber base and continued expansion in the number of Company-owned
retail stores. Other expenses associated with the subscriber base and
staffing level growth included higher bad debts as well as increased
store and building occupancy costs related to expansion.
- Restructuring and workforce reduction expenses were related to staff
reductions associated with the integration of the wireline and
wireless operations. This initiative is expected to continue during
the year and is a component of the Company's competitive efficiency
program.
-------------------------------------------------------------------------
EBITDA and EBITDA margin -
wireless segment Quarters ended March 31
2006 2005 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 395.9 337.4 17.3 %
EBITDA margin (%) 44.6 44.5 0.1 pts
-------------------------------------------------------------------------
Wireless segment EBITDA increased by $58.5 million in the first quarter
of 2006, when compared to the same period in 2005. The increase in EBITDA was
a result of the revenue growth from the 14.9% increase in the subscriber base
and the $2 increase in ARPU that was only partially offset by the higher COA
per gross subscriber addition and operations costs to support the growth. The
EBITDA margin, when calculated as a percentage of Network revenue, was 48.0%
in the first quarter of 2006, compared with 48.5% in the same period in 2005.
Wireless segment capital expenditures are discussed in Section 7.2 Cash
used by investing activities.
6. Financial condition
The following are the significant changes in the consolidated balance
sheets between December 31, 2005 and March 31, 2006.
-------------------------------------------------------------------------
March 31, Dec. 31, Change % Change Explanation
($ millions) 2006 2005
-------------------------------------------------------------------------
Current Assets
Cash and (1.1) 8.6 (9.7) (112.8)% See Section 7.
temporary Liquidity and
investments, net capital resources
-------------------------------------------------------------------------
Accounts 610.3 610.3 - 0.0 % Increased by
receivable $100 million for
the reduction in
proceeds from
securitized
accounts receiv-
able (see Section
7.6 Accounts
receivable sale),
offset by signi-
ficant receipts
from large custo-
mers and lower
seasonal wireless
receivables
-------------------------------------------------------------------------
Income and - 103.7 (103.7) (100.0)% Refunds of
other taxes $122.4 million
receivable including
interest were
received in 2006;
the remaining net
taxes were recla-
ssified to cur-
rent liabilities
-------------------------------------------------------------------------
Inventories 151.0 138.8 12.2 8.8 % Primarily an
increase in wire-
less handset
inventories for
the introduction
of new high-end
products
-------------------------------------------------------------------------
Prepaid expen- 243.2 154.7 88.5 57.2 % Primarily prepay-
ses and other ment of annual
wireless licence
fees, federal
Canada Pension
Plan and Employ-
ment Insurance
premiums, other
licences and
insurance
-------------------------------------------------------------------------
Current portion 86.9 226.4 (139.5) (61.6)% Utilization of
of future losses and chan-
income taxes ges in non-deduc-
tible reserves
-------------------------------------------------------------------------
Current
Liabilities
Accounts 1,346.0 1,393.7 (47.7) (3.4)% Primarily reduced
payable payroll liabili-
and accrued ties and lower
liabilities operating & capi-
tal expenses in
the first quarter
versus the fourth
quarter, partly
offset by an
increase in
accrued interest
payable
-------------------------------------------------------------------------
Income and 8.7 - 8.7 n. m. Net taxes payable
other taxes over the next
payable 12 months
-------------------------------------------------------------------------
Restructuring 41.5 57.1 (15.6) (27.3)% Payments under
and workforce previous programs
reduction exceeded new
accounts payable obligations
and accrued
liabilities
-------------------------------------------------------------------------
Advance 575.4 571.8 3.6 0.6 % Primarily an
billings and increase in price
customer cap deferred
deposits revenues
-------------------------------------------------------------------------
Current 75.5 5.0 70.5 n. m. Includes
maturities of $70.0 million of
long-term debt 7.1%TCI medium-
term Notes,
maturing in
February 2007.
-------------------------------------------------------------------------
Working (956.8) (785.1) (171.7) (21.9)% Includes a reduc-
capital(1) tion of the cur-
rent portion of
future income
taxes receivable
-------------------------------------------------------------------------
Capital 10,859.2 10,941.5 (82.3) (0.8)% See Sections 5.3
Assets, Net Consolidated re-
sults from opera-
tions - Deprecia-
tion and amorti-
zation and 7.2
Cash used by
investing activi-
ties - capital
expenditures
-------------------------------------------------------------------------
Other Assets
Deferred 884.3 850.2 34.1 4.0 % Primarily pension
charges plan contribu-
tions in excess
of charges to
income
-------------------------------------------------------------------------
Investments 27.9 31.2 (3.3) (10.6)% Divestiture of
certain portfolio
investments, net
of new invest-
ments
-------------------------------------------------------------------------
Goodwill 3,155.0 3,156.9 (1.9) (0.1)% A small divesti-
ture by TELUS
International
-------------------------------------------------------------------------
Long-Term Debt 4,513.4 4,639.9 (126.5) (2.7)% Reclassification
to current matur-
ities of
$70.5 million and
repayment of
$71 million of
drawn against
TELUS'
three-year credit
facility. The
Canadian dollar
value of U.S.
dollar Notes inc-
reased by approxi-
mately $15 mil-
lion due to a
slight decline in
the Canadian
dollar.
-------------------------------------------------------------------------
Other Long- 1,636.9 1,635.3 1.6 0.1 % Includes small
Term increases in a
Liabilities number of de-
ferred liabili-
ties, partly off-
set by a $15 mil-
lion decrease in
the deferred hed-
ging liability
for U.S. Dollar
Notes.
-------------------------------------------------------------------------
Future Income 997.3 1,023.9 (26.6) (2.6)% Decrease in temp-
Taxes orary differences
for long-term
assets and liabi-
lities.
-------------------------------------------------------------------------
Non-Controlling 27.7 25.6 2.1 8.2 % The increase
Interest arose from
minority
partners' share
of several small
subsidiaries
-------------------------------------------------------------------------
Shareholders'
Equity
-------------------------------------------------------------------------
Common equity 6,794.3 6,870.0 (75.7) (1.1)% Reduced during
the first quarter
of 2006 primarily
by:
- Normal Course
Issuer Bid ex-
penditures of
$231.6 million;
and
- Dividends of
$95.9 million;
partly offset by
increases from:
- Net income of
$210.1 million;
and
- An increase of
$36.1 million
in Common Share
and Non-Voting
Share capital
for the exer-
cise of
options.
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
7. Liquidity and capital resources
7.1 Cash provided by operating activities
-------------------------------------------------------------------------
($ millions) Quarters ended March 31
2006 2005 Change
-------------------------------------------------------------------------
673.1 728.4 (7.6)%
-------------------------------------------------------------------------
Cash provided by operating activities decreased by $55.3 million in the
first quarter of 2006, when compared with the same period in 2005. The use of
$100 million to reduce proceeds from securitized accounts receivable during
the first quarter of 2006, was offset by a significant reduction in trade
accounts receivable in the same period.
The decrease in cash provided by operating activities was caused by the
significant reductions in trade accounts payable of approximately $80 million
and accrued payroll liabilities of approximately $70 million in the first
quarter of 2006, as well as the $12.2 million increase in inventories in the
first quarter of 2006 compared to a reduction of $22.3 million in inventories
in the prior year period. Partly offsetting this were: (i) the $96.8 million
increase in income tax recoveries received net of installment payments; (ii)
the $16.2 million increase in interest received, primarily due to one-time
interest on tax refunds received in the first quarter of 2006; and (iii) the
$6.9 million reduction in employer contributions to employee defined benefit
plans due to net acceleration of funding in the first quarter of 2005.
7.2 Cash used by investing activities
-------------------------------------------------------------------------
($ millions) Quarters ended March 31
2006 2005 Change
-------------------------------------------------------------------------
316.1 306.2 3.2 %
-------------------------------------------------------------------------
Cash used by investing activities increased by $9.9 million in first
quarter of 2006, when compared with the same period in 2005. The increase was
primarily due to greater capital expenditures, partly offset by increased
proceeds for sale of properties and other assets as well as the use of
$27.5 million for an acquisition in the same period in 2005. Assets under
construction increased to $628.6 million at March 31, 2006, compared with
$516.4 million at December 31, 2005, due to capitalized costs related to
development of a new billing system in the wireline segment as well as in-
progress costs for new service development and network enhancement.
-------------------------------------------------------------------------
Capital expenditures by segment
($ in millions, Quarters ended March 31
except capital expenditure intensity) 2006 2005 Change
-------------------------------------------------------------------------
Wireline segment 259.0 213.6 21.3 %
Wireless segment 61.5 59.6 3.2 %
-------------------------------------------------------------------------
TELUS consolidated 320.5 273.2 17.3 %
-------------------------------------------------------------------------
Capital expenditure intensity (1) (%) 15.4 13.8 1.6 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.
-------------------------------------------------------------------------
- Wireline segment capital expenditures increased by $45.4 million in
the first quarter of 2006, when compared to the same period in 2005.
ILEC capital expenditures increased by approximately $40 million to
$232 million with the increased spending primarily for network access
growth, broadband build and service development, as well as catch-up
on activities deferred in 2005 due to the work stoppage. Wireline non-
ILEC capital expenditures increased by approximately $5 million to
$27 million in the first quarter of 2006, when compared with the same
period in 2005 to support the roll-out of new services.
The wireline segment capital expenditure intensity ratio was 21.2% in
the first quarter of 2006, compared with 17.2% in the first quarter of
2005. Cash flow (EBITDA less capital expenditures) decreased by 31.9%
to $207.8 million due lower EBITDA and increased capital expenditures.
- Wireless segment capital expenditures increased by $1.9 million in the
first quarter of 2006. Capital expenditure intensity for the wireless
segment was a seasonally low 6.9% in the first quarter of 2006, as
compared with 7.9% in the same period last year. Wireless cash flow
(EBITDA less capital expenditures) in the first quarter of 2006
increased to a record $334.4 million for TELUS, representing an
increase of 20.4% over the first quarter of 2005.
TELUS' EBITDA less capital expenditures (see Section 11.1 EBITDA for the
calculation) decreased by 7.0% to $542.2 million, when compared with the same
period in 2005. The decrease resulted primarily from higher wireline capital
expenditures.
7.3 Cash used by financing activities
-------------------------------------------------------------------------
($ millions) Quarters ended March 31
2006 2005 Change
-------------------------------------------------------------------------
366.7 71.4 n. m.
-------------------------------------------------------------------------
Cash used by financing activities increased by $295.3 million in the
first quarter of 2006, when compared with the same period in 2005, primarily
due to larger purchases of shares under NCIB programs and cash dividends paid
to shareholders. Financing activities included:
- Proceeds from Common Shares and Non-Voting Shares issued were
$33.2 million in the first quarter of 2006, a decrease of
$54.7 million when compared with the same period in 2005. The decrease
was mainly due to the exercise of a smaller number of options in 2006.
- Cash dividends paid to shareholders were $95.9 million in the first
quarter of 2006, representing funds remitted on March 31, 2006 for the
dividend payable on April 1, 2006. In 2005, dividends payable on
April 1, 2005 were remitted on April 1 and recorded as paid in the
second quarter of 2005.
- The Company's current NCIB program came into effect on December 20,
2005 and is set to expire on December 19, 2006. In the first quarter
of 2006, approximately 1.8 million TELUS Common shares and 3.3 million
TELUS Non-Voting Shares were purchased for cancellation for a total of
$231.6 million. The following table outlines the shares repurchased
and costs under the second NCIB program for 2006 and cumulatively.
Second normal course issuer bid program
-------------------------------------------------------------------------
Purchased for cancellation
Percen-
----------------------------------- Maximum tage of
In 2005 Q4 permitted maximum
(from for repur-
Shares Dec. 20) In 2006 Q1 Cumulative repurchase chased
-------------------------------------------------------------------------
Common Shares 634,469 1,783,300 2,417,769 12,000,000 20.1 %
Non-Voting
Shares 607,700 3,334,500 3,942,200 12,000,000 32.9 %
-------------------------------------------------------------------------
Total 1,242,169 5,117,800 6,359,969 24,000,000 26.5 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cost of repurchase
----------------------------------
In 2005 Q4
(from
$ millions Dec. 20) In 2006 Q1 Cumulative
---------------------------------------------------
Reduction of:
Share capital 20.9 93.3 114.2
Retained earnings 36.6 138.3 174.9
---------------------------------------------------
Total 57.5 231.6 289.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In comparison, during the first quarter of 2005 under the previous NCIB
program, the Company purchased approximately 2.1 million Common Shares and
approximately 2.0 million Non-Voting Shares for total consideration of
$158.3 million. The total repurchases under both NCIB programs, for the period
of December 20, 2004 to March 31, 2006, were approximately 12.7 million Common
Shares and 15.4 million Non-Voting Shares for total consideration of
approximately $1.2 billion.
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
As at, or 12-month periods,
ended March 31 2006 2005 Change
-------------------------------------------------------------------------
Components of debt and coverage
-------------------------------
ratios(1)
---------
Net debt ($ millions) 5,732.7 6,127.6 (394.9)
Total capitalization - book value
($ millions) 12,554.7 13,271.7 (717.0)
EBITDA excluding restructuring
($ millions) 3,363.0 3,271.6 91.4
Net interest cost ($ millions) 611.7 606.7 5.0
Debt ratios
-----------
Fixed-rate debt as a proportion of
total indebtedness (%) 98.8 93.2 5.6
Average term to maturity of debt (years) 5.2 5.1 0.1
Net debt to total capitalization (%)(1) 45.7 46.2 (0.5) pts
Net debt to EBITDA(1) 1.7 1.9 (0.2) pts
Coverage ratios(1)
------------------
Interest coverage on long-term debt 2.6 2.5 0.1 pts
EBITDA interest coverage 5.5 5.4 0.1 pts
Other measures
--------------
Free cash flow ($ millions) -
12-month trailing(2) 1,539.0 1,420.6 118.4
Dividend payout ratio (%)(1) 59 41 18 pts
-------------------------------------------------------------------------
(1) See Section 11.4 Definition of liquidity and capital resource
measures.
(2) See Section 11.2 Free cash flow for the definition.
-------------------------------------------------------------------------
Net debt measured at March 31, 2006 decreased when compared to one-year
earlier due to early redemption of $1.578 billion of Notes on December 1, 2005
and the conversion and redemption of $142 million of convertible debentures in
the second quarter of 2005, partly offset by the use of cash and temporary
investments (cash is netted against debt for the purposes of this
calculation). The proportion of fixed-rate debt increased when TELUS
terminated swap agreements concurrent with the early redemption of Notes in
December 2005. Total capitalization also decreased for these reasons as well
as a decrease in common equity due primarily to share repurchases under NCIB
programs. The net debt to EBITDA ratio measured at March 31, 2006 improved as
a result of debt reduction and an increase in 12-month trailing EBITDA
excluding restructuring.
Interest coverage on long-term debt improved because of increased income
before interest and taxes. The EBITDA interest coverage ratio improved as a
result of higher EBITDA (excluding restructuring), while net interest was not
significantly changed. The free cash flow measure for the twelve month period
ending March 31, 2006 increased when compared with the measure one year
earlier, primarily because of improved EBITDA, increased cash tax recoveries
and interest received, partly offset by higher capital expenditures. The
dividend payout ratio for the twelve months ending March 31, 2006 exceeded the
target guideline of 45 to 55% for reported net earnings as a result of the
temporary expenses associated with the work stoppage. When normalized to
exclude the impact of the 2005 work stoppage, the dividend payout ratio
measured for the twelve months ending March 31, 2006 was approximately 52%. In
contrast, the dividend payout ratio for the twelve month period ending March
31, 2005 was lower than the target guideline due to significant one-time tax
recoveries included in net earnings.
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 1.5:1 to 2.0:1
- Dividend payout ratio of 45 to 55% of sustainable net earnings.
7.5 Credit facilities
TELUS had available liquidity from unutilized credit facilities of
approximately $1.5 billion at March 31, 2006.
-------------------------------------------------------------------------
Outstanding
Credit Facilities undrawn
At March 31, 2006 letters of
($ in millions) Expiry Size Drawn credit
-------------------------------------------------------------------------
Five-year revolving
facility(1) May 4 2010 800.0 - -
Three-year revolving
facility(1) May 7 2008 800.0 71.0 100.6
Other bank facilities - 74.0 - 6.4
-------------------------------------------------------------------------
Total - 1,674.0 71.0 107.0
------------------------------------------------------------------------
(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 March 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
5.5:1 at March 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 and continued access to TELUS' credit facilities is not
contingent on the maintenance by TELUS of a specific credit rating.
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, and March 1, 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. TCI is
required to maintain at least a BBB (low) credit rating by Dominion Bond
Rating Service ("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 May 3, 2006. The balance of proceeds from securitized
receivables was reduced from $500 million to $325 million on January 31, 2006,
and subsequently increased to $400 million on March 31, 2006. It is necessary
to retain a minimum of $150 million proceeds under this program to keep it
active.
7.7 Credit ratings
As of May 3, 2006 TELUS and TCI investment grade credit ratings were
unchanged from those reported in TELUS' annual 2005 Management's discussion
and analysis in Section 7.7. On March 1, 2006, Dominion Bond Rating Service
confirmed its ratings for TELUS and TCI. 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.
7.8 Off-balance sheet arrangements, commitments and contingent
liabilities
Financial instruments (Note 3 of the interim consolidated financial
statements)
During the first quarter of 2006, the Company entered into a hedging
relationship that fixes the Company's compensation cost arising from a
specific grant of restricted stock units; hedge accounting has been applied to
this relationship.
As at March 31, 2006, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rate on U.S.
$28 million of fiscal 2006 purchase commitments; hedge accounting has been
applied to these foreign currency forward contracts, all of which relate to
the wireless segment.
In contemplation of the planned refinancing of the debt maturing June 1,
2007, the Company had entered into forward starting interest rate swap
agreements, as at March 31, 2006, that have the effect of fixing the
underlying interest rate on up to $300 million of replacement debt. Hedge
accounting has been applied to these forward starting interest rate swap
agreements.
The fair values of the Company's long-term debt are estimated based on
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same maturity as well as the use of
discounted future cash flows using current rates for similar financial
instruments subject to similar risks and maturities. The fair values of the
Company's derivative financial instruments used to manage exposure to interest
rate and currency risks are estimated similarly. The carrying amount and fair
value of long-term debt are as follows:
As at As at
March 31 2006 December 31 2005
-------------------------------------------------------------------------
($ millions) Carrying Fair Carrying Fair
amount value amount value
-------------------------------------------------------------------------
Long-term debt
Principal 4,588.9 5,208.1 4,644.9 5,371.6
Derivative financial
instruments used to manage
interest rate and currency
risks associated with U.S.
dollar denominated debt
(Hedging item maximum
maturity date: June 2011) 1,139.1 1,489.2 1,154.3 1,470.5
-------------------------------------------------------------------------
5,728.0 6,697.3 5,799.2 6,842.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingent liabilities
The Company has a $41.5 million liability recorded for outstanding
commitments under its restructuring programs as at March 31, 2006, most of
which relates to programs initiated prior to 2006. The Company's commitments
and contingent liabilities, which are summarized in Note 14 of the interim
consolidated financial statements, have not changed significantly in the
three-month period ended March 31, 2006, except for the following:
Deferral accounts
On February 16, 2006, the Canadian Radio-television and
Telecommunications Commission issued Decision CRTC 2006-9, "Disposition of
funds in the deferral account". In its decision the Canadian Radio-television
and Telecommunications Commission 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
telecommunication 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 Canadian Radio-television and Telecommunications Commission 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.
Pay equity
On December 16, 1994, the Telecommunications Workers Union ("TWU") filed
a complaint against BC TEL, a predecessor of TELUS Communications Inc. (TCI),
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 negotiated settlement between TCI and the TWU
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 five-year collective
agreement; the TWU 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.
7.9 Outstanding share information
The following is a summary of the outstanding shares for each class of
equity at March 31 2006 and at April 21, 2006. In addition, for April 21, 2006
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.
-------------------------------------------------------------------------
Class of equity security
Common Non-Voting Total
Shares Shares Shares
(millions of shares) outstanding outstanding outstanding
-------------------------------------------------------------------------
At March 31, 2006
Common equity - Common Shares
outstanding 181.9 - 181.9
Common equity - Non-Voting
Shares outstanding - 164.4 164.4
----------- ----------- -----------
181.9 164.4 346.3 (1)
----------- ----------- -----------
At April 21, 2006
Common equity - Common Shares
outstanding 181.9 - 181.9
Common equity - Non-Voting
Shares outstanding - 164.5 164.5
----------- ----------- -----------
181.9 164.5 346.4
----------- ----------- -----------
Outstanding and issuable
shares(2) at April 21, 2006
Common Shares and Non-Voting
Shares outstanding 181.9 164.5 346.4
Options(3) 1.3 20.8 22.1
----------- ----------- -----------
183.2 185.3 368.5
----------- ----------- -----------
----------- ----------- -----------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share for the
first quarter of 2006, the number of shares was 352.9.
(2) Assuming full conversion and ignoring exercise prices.
(3) Not reduced by any options that may be forfeited or cancelled during
the period April 1 to April 21.
-------------------------------------------------------------------------
8. Critical accounting estimates and accounting policy developments
8.1 Critical accounting estimates
TELUS' critical accounting estimates that are described Section 8.1 of
its 2005 annual Management's discussion and analysis. The preparation of
financial statements in conformity with generally accepted accounting
principles 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.
8.2 Accounting policy developments
Accounting policies are consistent with those described in Note 1 of
TELUS' annual 2005 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.
Possibly commencing with the Company's 2006 fiscal year, proposed
amendments to the recommendations of the CICA for the calculation and
disclosure of earnings per share (CICA Handbook Section 3500) may apply to the
Company. The proposed amendments are not expected to materially impact the
Company. Amendments and proposed amendments commencing in the Company's 2007
fiscal year or later are described in Note 2 of the interim consolidated
financial statements.
9. Revised annual guidance for 2006
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 of TELUS' annual 2005
Management's discussion and analysis and significant updates in Section 10:
Risks and risk management of this report.
The Company has a practice of reaffirming or adjusting annual guidance on
a quarterly basis. There is no assurance that these assumptions or the revised
2006 financial and operating targets and projections will turn out to be
accurate. The annual guidance increase for high-speed Internet subscriber net
additions reflects positive results for the first quarter of 2006.
-------------------------------------------------------------------------
Revised guidance Original targets Change
for 2006 for 2006
-------------------------------------------------------------------------
Consolidated
Revenues no change $8.6 to $8.7 billion no change
EBITDA(1) no change $3.5 to $3.6 billion no change
Earnings per share -
basic no change $2.40 to $2.60 no change
Capital expenditures no change $1.5 to $1.55 billion no change
Free cash flow(2) no change $1.55 to $1.65 billion no change
-------------------------------------------------------------------------
Wireline segment
Revenue (external) no change $4.825 to $4.875 billion no change
Non-ILEC revenue no change $650 to $700 million no change
EBITDA no change $1.8 to $1.85 billion no change
Non-ILEC EBITDA no change $25 to $40 million no change
Capital expenditures no change $1.05 to $1.1 billion no change
High-speed Internet More than Approx.
net additions 125,000 More than 100,000 25,000
-------------------------------------------------------------------------
Wireless segment
Revenue (external) no change $3.775 to $3.825 billion no change
EBITDA no change $1.7 to $1.75 billion no change
Capital expenditures no change Approx. $450 million no change
Wireless subscriber
net additions no change More than 550,000 no change
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest taxes depreciation and
amortization (EBITDA).
(2) See Section 11.2 Free cash flow.
-------------------------------------------------------------------------
10. Risks and risk management
TELUS' approach to the management of risk has not changed significantly
from that described in Section 10: Risks and risk management of the Company's
2005 annual Management's discussion and analysis. The following are
significant updates to the risks described in the annual MD&A.
10.1 Regulatory
The outcome of any existing or future regulatory reviews, proceedings,
court appeals, Federal Cabinet appeals or other regulatory developments could
have a material impact on TELUS' operating procedures, costs and revenues.
Price cap regulation - Disposition of funds in the deferral accounts
(Telecom Decision CRTC 2006-9)
On February 16, 2006, the CRTC issued a decision on the use of funds in
the deferral account. One aspect of the Decision is that, prospectively
beginning June 1, 2006, no further amounts are to be added to the deferral
account. The funds that have accumulated in the deferral account over the
second price cap period (2002 to 2006) will be used to expand broadband
facilities (95%) and to improve access to telecommunications services persons
with disabilities (5%). Any remaining balance in the deferral account will be
addressed through and are to be dealt with via prospective residential local
rate reductions. TELUS currently expects that the effect on wireline local
revenues in 2006 will not be significant given the approval and implementation
process as outlined in Telecom Decision CRTC 2006-9. The Company is in the
process of consulting with provincial governments and the CRTC for qualifying
projects that, if approved, would reduce or extinguish the liability in the
deferral account.
Federal review of telecommunications policy and regulatory framework
In 2005, the federal government undertook a review of Canada's
telecommunications policy and regulatory framework. The review panel released
its Telecom Policy Review report of recommendations to the Minister of
Industry in March 2006. Some of the key points of this 350-page report were:
- There should be an end to the presumption that telecom services must
be regulated and a shift to reliance on market forces.
- Where regulation remains, it should be light-handed and flexible and
must be justified in all circumstances.
- There should be new policy objectives and guidelines in the
Telecommunications Act that focus on competition and market forces.
- Government should direct the CRTC to act as if the report's major
recommendations are in effect, pending the necessary legislative
changes.
- There is no recommendation for licensing a fourth wireless carrier.
- There is no obligation on incumbents to subsidize broadband expansion.
There should be a national broadband expansion plan that is publicly-
funded.
- Foreign ownership restrictions in telecommunications should be
liberalized in a two-step process, with the first focusing on
providers with less than 10% market share.
TELUS is generally satisfied with the recommendations and reforms
recommended in the Telecom Policy Review report and encourages the federal
government to move quickly to implement the major recommendations in the
report. There can be no assurance that the federal government will implement
the recommendations in this report, or that the recommendations will be
implemented in the near future.
Forbearance from the regulation of retail local exchange services
(Telecom Decision CRTC 2006-15)
On April 6, 2006, the CRTC set the criteria for deregulation of local
exchange telephony services, following a year-long public process. The process
put into place for achieving forbearance is very complex and an individual
forbearance application could take up to two years to be completed. One
positive aspect of this decision is an immediate relaxation of winback
restrictions. The Company believes that the April 2006 forbearance decision
does not sufficiently align with the recommendations of the March 2006
Telecommunications Policy Review report.
The key aspects of this decision were:
Winback restrictions:
- The current no-contact period for residential is rolled back
immediately to 90 days from one year.
- The no-contact rule is to be completely eliminated when competitors
have gain 20% market share and the ILEC has met its competitor quality
of service indicators in the relevant market for the previous three
months.
The forbearance test:
- The market share loss threshold for forbearance is 25%. The test will
be applied separately to local business and residential markets. In
contrast, the forbearance threshold is a 5% market share loss for the
cable-TV industry.
- In urban and rural markets, the CRTC will use various areas (e.g.
Census Metropolitan Areas and Economic Regions) based on Statistics
Canada data to define the geographic area to which the test will be
applied. The geographic areas are large, which in turn increases the
effective market share loss threshold and the expected dates for
qualifying for forbearance is uncertain.
- Before forbearance is granted, ILECs must meet individual standards
for each of the 14 specified competitor quality-of-service indicators,
on average over a six-month period, and implement access to
operational support systems, prior to an application for forbearance
in the relevant market.
Regulatory framework for mobile television broadcasting services
(Broadcasting Public Notice CRTC 2006-47)
On April 12, 2006, the CRTC ruled that mobile television broadcasting
will not be regulated, as such services are delivered over the Internet and
fall under the existing new media exemption order ("NMEO"). The NMEO is not
subject to any conditions, leaving mobile broadcasting services entirely
unregulated. The exemption order means that TELUS has the flexibility to
develop its mobile TV service to meet market demands without regulatory
impediments.
In addition to the exemption order, the CRTC also initiated a proceeding
to deal with mobile broadcasting that does not fall under the NMEO
(Broadcasting Public Notice CRTC 2006-48). Comments on this proceeding are due
on May 12, 2006.
Implementation of wireless number portability ("WNP") - Telecom
Decision CRTC 2005-72
On December 20, 2005, the CRTC issued Decision 2005-72 and directed Bell
Mobility, Rogers Wireless Inc. and the wireless division of TELUS to implement
wireless number portability 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, wireless number portability (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 wireless number portability in the
required timeframe without incurring significant additional costs and/or
ongoing administration costs. Implementation of wireless number portability
may result in increased migration of network access lines to wireless
services, increased wireless subscriber monthly churn or additional customer
retention costs for TELUS.
WNP, when instituted in the U.S. in 2003, did not cause a large increase
in churn as was 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 our 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.
10.2 Human resources
The outcome of outstanding collective bargaining at TELUS Quebec may
result in increased costs, reduced productivity or work disruptions
In March 2006, TELUS Quebec and the Syndicat des agents de maitrise de
TELUS concluded negotiations for a new collective agreement covering 523
professional and supervisory employees. The agreement was ratified by union's
members and came into effect on April 1, 2006. The new agreement is a one-year
contract that includes a 1.75% salary increase.
Negotiations between TELUS Quebec and the Syndicat quebecois des employes
de TELUS continue for the expired collective agreement covering approximately
one thousand office, clerical and technical employees. There can be no
assurance that the negotiated compensation expenses will be as planned, or
that reduced productivity and work disruptions will not occur as a result of
or following these negotiations.
10.3 Business integration and internal reorganizations
On November 24, 2005, TELUS Corporation announced the integration of the
wireline and wireless operations of the business into a single operating
structure. This integration 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 planned and/or that there will not be significant difficulties in
combining the two structures, which could result in a negative impact on
operating and financial results.
10.4 Process risks
TELUS systems and processes could negatively impact financial
results and customer service - Billing/revenue assurance
TELUS continues to develop a new billing system for the wireline segment
of our business, 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. TELUS plans to implement this project in phases
beginning with the implementation of consumer accounts in Alberta, currently
scheduled later in 2006, and followed by implementation of consumer customer
accounts in B.C. 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.
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. The Company also believes 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:
-------------------------------------------------------------------------
Quarters ended March 31
($ millions) 2006 2005
-------------------------------------------------------------------------
Net income 210.1 242.2
Other expense (income) 4.3 1.5
Financing costs 127.0 138.4
Income taxes 116.1 70.3
Non-controlling interest 2.1 1.6
-------------------------------------------------------------------------
Operating income 459.6 454.0
Depreciation 339.2 329.9
Amortization of intangible assets 63.9 72.3
-------------------------------------------------------------------------
EBITDA 862.7 856.2
-------------------------------------------------------------------------
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:
-------------------------------------------------------------------------
Quarters ended March 31
($ millions) 2006 2005
-------------------------------------------------------------------------
EBITDA 862.7 856.2
Capital expenditures (Capex) (320.5) (273.2)
-------------------------------------------------------------------------
EBITDA less capital expenditures 542.2 583.0
-------------------------------------------------------------------------
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 performance of the
consolidated operations. 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 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:
-------------------------------------------------------------------------
Quarters ended March 31
($ millions) 2006 2005
-------------------------------------------------------------------------
Cash provided by operating activities 673.1 728.4
Cash (used) by investing activities (316.1) (306.2)
-------------------------------------------------------------------------
357.0 422.2
Net employee defined benefit plans expense 1.6 (1.5)
Employer contributions to employee defined
benefit plans 30.5 37.4
Other operating activities net (15.9) 4.6
Reduction (increase) in securitized accounts
receivable 100.0 -
Non-cash working capital changes except changes in
taxes, interest, and securitized accounts
receivable, and other 171.3 70.9
Acquisition - 27.5
Proceeds from the sale of property and other assets (7.4) (0.7)
Other investing activities 3.0 6.2
-------------------------------------------------------------------------
Free cash flow 640.1 566.6
-------------------------------------------------------------------------
The following shows management's calculation of free cash flow.
-------------------------------------------------------------------------
Quarters ended March 31
($ millions) 2006 2005
-------------------------------------------------------------------------
EBITDA 862.7 856.2
Restructuring and workforce reduction costs net of
cash payments (15.6) (12.3)
Share-based compensation 8.4 3.8
Cash interest paid (13.1) (13.1)
Cash interest received 22.5 6.3
Income taxes received (paid) 95.7 (1.1)
Capital expenditures ("Capex") (320.5) (273.2)
-------------------------------------------------------------------------
Free cash flow 640.1 566.6
-------------------------------------------------------------------------
11.3 Definition of key operating indicators
These measures are industry metrics and are useful in assessing the
operating performance of a wireless company.
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 per gross subscriber addition is calculated as cost of acquisition
divided by gross subscriber activations during the period.
Average revenue per subscriber unit ("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
text messaging, mobile computing, personal digital assistance devices, browser
activity and downloads.
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.
EBITDA excluding COA is a measure of operational profitability normalized
for the period costs of adding new customers.
11.4 Definition of liquidity and capital resource measures
The following definitions are presented in the order that they appear in
Section 7.4 Liquidity and capital resource measures.
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.
Net debt is one component of a ratio used to determine compliance with debt
covenants (refer to the description of Net debt to EBITDA below).
-------------------------------------------------------------------------
At March 31
($ millions) 2006 2005
-------------------------------------------------------------------------
Current maturities of long-term debt 75.5 4.4
Long-term debt 4,513.4 6,356.3
-------------------------------------------------------------------------
4,588.9 6,360.7
Deferred hedging liability 1,142.7 1,014.2
-------------------------------------------------------------------------
Debt 5,731.6 7,374.9
Cash and temporary investments 1.1 (1,247.3)
-------------------------------------------------------------------------
Net debt 5,732.7 6,127.6
-------------------------------------------------------------------------
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.
Total capitalization is defined as Net debt plus Non-controlling interest
and Shareholders' equity.
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%.
EBITDA excluding restructuring 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 $61.2 million and
$46.1 million respectively for the twelve month periods ended March 31, 2006
and 2005.
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. This measure
is substantially the same as the Leverage Ratio covenant in TELUS' credit
facilities. TELUS' revised guideline range for Net debt to EBITDA is from
1.5:1 to 2.0:1.
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.
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 March 31, 2006 includes
losses on redemption of long-term debt and an accrual for estimated costs to
settle a lawsuit.
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.
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.
Funded debt, in general terms, is borrowed funds less cash on hand as
defined in the Company's bank agreements.
_____________________________________________________________________________
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: May 3, 2006
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary
______________________________________________________________________________